Restaurant Business Loans

Securing Loans for Your Restaurant Start Up

Opening a restaurant is one of the most exciting small business startups that an entrepreneur can engage. If you’re taking this journey, you have come up with a concept that is fresh and innovative in your community, both in terms of cuisine as well as the overall ambiance. This represents a significant risk, as many of the new restaurants that open each year end up closing within 12 months. However, if you can get your business together and attract a clientele, this is a terrific way to make a lot of money while giving your community a unique gustatory experience.

Creative ways to gain Restaurant Startup Financing

Starting a small restaurant business involves a significant level of cost, as you might imagine. Before we move into a discussion of some creative ways to gain restaurant startup financing, let’s take a look at some of the costs you will face as you put your business plan together.

Restaurant Startup Costs

One of the most basic cost areas includes rent and utilities. Depending on where your restaurant is located, you can expect to pay between $10,000 and $15,000 for your first month’s rent, and the same amount again as your security deposit. There are also the utilities from the first month to consider, which can go as high as $3,000 or $4,000 – including telephone and Internet service. If you are going to buy a lot and build, or buy an existing building, that will bring about a significant cost all its own – and you still need to have the money of those utilities in mind.

The above costs do not include the price of improving the space so that it meets your needs. If you’re going to have to add a customized buildout for your kitchen, plan to spend as much as $400,000. Furniture for your restaurant, including tables and chairs, could easily cost $40,000 or $50,000. Then there’s all the bar equipment, as well as the tableware, dishes and kitchen utensils. Block out $75,000-$100,000 for that. You’ll need to lay in your first round of beverages and ingredients, which could easily cost you $10,000 to $12,000. Even if you’ve already thought of all this, you can easily see why so many people are curious about loans for restaurant business operations.

Other Restaurant Expenses

Then you have some of the other expenses that come with opening a restaurant – or any number of other types of businesses. You need insurance, licenses and permits, and technology such as your POS system. Plan on spending up to $40,000 total on all of those items. Unless you’re a bookkeeper as well as a chef, you’ll likely have to outsource the accounting for your restaurant, which will add costs as well.

Finally, you need to get the word about your new establishment. You’ll need signage ($15,000 – $20,000), menus ($1,000 – $2,000), some fliers to spread around the community ($5,000), local ads and social media campaigns ($10,000 – $15,000). When you add in business cards and an event to celebrate the opening of your restaurant (plan $15,000 – $20,000 for this shindig), then you can see that you could easily spend as much as $600,000 just to get your restaurant open.

There are some ways that you can save on some of these expenses, keeping your restaurant startup capital requirements lower.

Start out with secondhand equipment.

None of the customers who come into your restaurant to eat will ask to see your ovens, stoves and utensils. They’re not going to ask to see if they are shiny and new, and they aren’t going to fuss over brands. They will come to try your food, so as long as you have equipment that is clean and effective, then you are good to go. If another restaurant has gone under, you can often buy their equipment for pennies on the dollar. You do want to have quality equipment – but don’t overpay for new. Obviously, you can start out by financing your equipment through a separate loan, as many equipment retailers also offer credit for purchases, but then you’re adding another monthly obligation. So look online, peruse the secondhand market, and only buy the things that you absolutely need.

Only buy the technology that you need.

Yes, you need a bookkeeping system. Yes, you need a point-of-sale setup. No, your waiters don’t need iPads to take orders, unless your business model makes it an absolute must. However, even in the fanciest restaurants in downtown Vancouver and Toronto, there are still waiters who take orders using pen and paper. Your staff can probably do it too.

Don’t forget to negotiate the wi-fi costs for your restaurant too. If you live in an rea that offers multiple providers, shop your business around – and let the representatives know that you’re taking multiple bids. You’re more likely to get the best deal from sales reps that know that they have to win your business.

Be smart with your marketing money.

Don’t run out and hire an expensive ad agency to promote your restaurant. Just don’t. You might think that you need to spend big in this area to get people in the door, but there are some smart ways for you to do this, either by outsourcing individual tasks or dealing with some of these yourself. The Internet is beyond powerful nowadays when people are looking for restaurants. You don’t need to launch radio or television ads; nowadays, if people watch television, they’re watching a DVR program and just scroll right through the ads, and more and more people are plugging their smartphones into their car stereos anyway, listening to Spotify or Pandora instead of the FM or AM stations.

So make the Internet your friend. Make sure that your restaurant has attractive presences on the major social media platforms. Put ads on Twitter and Facebook, as well as some other social media sites. Start a blog and get the conversation going that way. Post links to your blogs social media. Get out to local businesses and hand out your flyers. Talk to other small business owners in your neighborhood to get a network of referrals up and running.

Renovate smarter, not costlier.

You might think that you need to move a wall to open up some space, but there are other ways to add some openness to a layout without making that costly move. Are those $3,000 chandeliers really necessary? Use paint colors and finishes, along with some impactful lighting and inexpensive landscaping, rather than expensive decorative items. Think about making a statement without spending too much money. Pinterest isn’t just a site for crafters – it has a ton of ideas for decorating big without spending big. Remember that you will need a contingency fund when you are improving an existing building. There are always last-minute cracks and leaks that you have to fix in a hurry, so you want to save at least $25,000 for those last-minute things.

Make wise menu choices.

If you’re skewing toward the higher end, don’t sign a contract with an expensive vendor. Start out with co-ops and local farmers, and build relationships with them to lock in prices. Take a look at your menu. If you have to turn the page more than two times, are you operating your restaurant in a smart way? It’s better to start simple, with fewer offerings, and then gradually add other items in once you have things going in the right direction. When it comes to fresh ingredients, don’t buy more than you will use before it spoils – this is particularly important when looking at produce. If the majority of guests aren’t finishing their meals, consider reducing your portion sizes – another way to cut costs.

The Dilemma:

Let’s say you’ve opened the restaurant and had things going quite well for the first nine months or so. Your clientele is still growing, but you’ve gotten some feedback about some changes that you really need to make to the restaurant. Or you’ve gotten wind of a restaurant going out of business on the other side of town that has the right layout to make a stellar second location for your existing concept.

Just because you’re opening a second edition of your restaurant, though, doesn’t mean that you can plan to skimp on the opening costs with the later edition. There will be some cost savings because you’ll be a little wiser about what it takes to open your restaurant concept, but don’t expect a major cost reduction with opening the second unit.

Trying to Qualify Through Banks

When you go to the bank to ask for information about small business restaurant loans, you can expect to get questions about your personal and business credit scores. You’ll be asked for personal and business tax returns, as well as statements for your personal and business checking and savings accounts and other assets. The bank will run personal and business credit scores for you (and any other co-owners). After they take in all this information, they’ll take at least a week to decide if you qualify for one of their restaurant startup loans. When it comes to small business loans, restaurants are one of the most common types of borrowers, but because restaurants go under so frequently – and because banks are still notoriously tight with their lending in the wake of the 2008 financial collapse – you may go through rejections from several banks in a process that takes several weeks – and leaves you without that money that you needed to open the second location.

Small restaurant loans can be tough to come by – and they can be hard to get in any industry where the entrepreneur comes to the table with fewer than 12 months in business. Banks want to see steady income over time, and if your restaurant hasn’t been open long enough for your liking, then it doesn’t matter how rosy your numbers are, and how much research you’ve done supporting the viability of that second location. The banks just won’t go for it, a lot of the time.

The Solution: An Business Loan or Merchant Advance through Best Bridge Capital

This is where a restaurant cash advance can make the difference for your company. We started Best Bridge Capital for the express purpose of helping this type of borrowing client – the entrepreneur who has his or her business up and running and has solid prospects for expansion, but who cannot get funding from the banks. We have built a network of entities who are willing to provide businesses like your restaurant with a cash advance based a lot more on your income than on your credit score.

How does a restaurant merchant cash advance work?

Well, there is one thing in common between applying for an advance and a bank loan, and that is that you will have to provide some documentation. You’ll still have to provide tax returns, bank statements and income record for your business, including (in many cases) reports for your credit and debit card transactions. However, when you apply through BBC, you just have to go through the process once for the whole network of lenders, because we distribute the information to every entity that matches your borrowing profile.

But that is where the similarities end. With a bank loan, you often have to wait a week just to hear whether you need to provide more documentation, let alone whether your application has been approved. With BBC’s network of cash advance providers, you can often hear an approval the same business day, but almost all of our borrowing customers hear within a business day or two. Instead of having to wait a month, or even longer, to receive your money, as you might with a bank, with our network of advance providers, you often receive your money within a week of applying.

How about payments?

With a bank loan, you receive a check for the amount of the loan (less fees), and then you have to start making fixed payments for principal and interest the next month, and each month thereafter. With a restaurant merchant cash advance, you also get a lump sum up front (less fees), but you don’t make monthly payments. Instead, you pay each business day (or each week, in some cases). Instead of a fixed amount, you pay a percentage of your receipts for that day or week.

How does it work? A Funding Example:

Let’s say that, on the basis of your receipts, you gain approval for an $800,000 cash advance. You’ll be assigned a factor rate of somewhere between 1.15 and 1.45. The lower your credit scores and the less consistent your income stream, the higher this number will go. For the purpose of this example, let’s say that you receive a factor rate of 1.2. You will pay back your advance amount times the factor rate, so in this case $800,000 x 1.2, or $960,000. The third number that you need to know is your repayment percentage. This is the percent of each day’s receipts that will go to the advance provider directly, to begin paying down that amount owed. So if your repayment rate is 15%, that means that for every $100 you bring in on a particular business day, the provider gets $15 up front, and you get the remaining $85.

In many cases, particularly when a restaurant is involved, the repayments come from credit and debit card receipts, which means that you don’t have to pay back any of the cash revenue that you bring in.

At first blush, you might think that paying $960,000 to take out $800,000 sounds like a lot of money. Even if it takes you a year to pay all the money back, that’s a 20% interest rate. If it takes 24 months, than its equivalent to a 10% rate, and the reason the retrieval percentage is so important.

The Merchant Cash Advantage

But think of the advantages. You applied for and received your money in the amount of time that it normally takes a bank to reply to your initial application, let alone put the money together. You dealt with an advance provider who rewarded you for your performance at your first restaurant, rather than a bank looking for holes in your application.

Instead of having to make monthly payments on a new loan, you pay on the basis of what you make. If a professional sports team decides to have a team dinner at your restaurant and run up a five-figure tab, then you’ll probably make an unusually large payment to the provider for that day. However, if you have a lot of crickets chirping at empty tables the day after Christmas, then you won’t be paying much at all to the provider for that day. Because of the way the payments are made, you will never have a late fee. When you’re done paying the balance off, your revenues will jump up to 100% of what you made.

Questions? Give BBC a call or an email. Tell us all about your new restaurant, and we’ll give you recommendations about the best way to get the liquidity you need.

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