What You Need to Know Before Financing a New Restaurant

restaurant startup financing
Be it culinary expertise, unmatched business acumen or maybe just a love of food, opening a restaurant is a lifelong dream for many. And for aspiring restaurateurs, the national forecast for restaurant sales are up more than three percent from 2010, projected to hit $600 billion this year. (Source: http://www.ncbr.com/article.asp?id=55866) This is generally good news for restaurant operators, restaurant workers and customers alike.

Yet for those looking to open their own operation and live their dreams, financing that grand vision may offer less of a rosy view. Restaurant start-up costs vary widely depending on the operation and the type of restaurant, but they can range from the ten-thousands to the millions of dollars – and who has that kind of up-front cash? Generally, unless a wealthy relative bequeathed a handsome fortune in your name, you’ll need to take out a loan.

Anticipate Your Opening Expenses

Before moving forward with any sort of loan paperwork, make a plan. Devise a business plan and revisit it often. Estimate how much start-up capital you’ll need by forecasting your anticipated start-up costs:

  • New construction. Building a restaurant from the ground up is almost always the most expensive way to go, since you’ll be paying for real estate and building materials in addition to the interior supplies and furnishings.
  • Equipment and supplies. Renovating an existing space can get pricey depending on the type of equipment you yourself need to furnish. Closely consider your menu, service-style and kitchen layout before buying anything.
  • Labor. Employee wages are one of the biggest expenses any operation incurs. You will most likely need some help before opening, too, so be sure to factor in contractor costs.
  • Marketing. In order to build sufficient buzz about your opening, you may need to put in some legwork. Post fliers, send mailers, pay for a few ads, or get your social media campaign up and running. Traditional marketing campaigns can cost a small fortune, so plan accordingly with this one.
  • Beginning inventory. Find a reliable food vendor or vendors, then make a big purchase. A little extra cushion for the first few days helps ensure you have enough for a grand opening rush.

Plan to Profit… in the Future

Once you open, there will be a period where you will probably still be spending more than you will be making. It’s important that you have a reserve of capital on hand, known as working capital, for the period when you are cash flow negative. Most operators plan to go through about a year of working capital before the restaurant actually becomes profitable on its own.

Explore Funding Options

Only after you have scrutinized your business plan and sufficiently planned out your expected start-up costs should you visit a lending institution or potential investor. This is when it pays to have all your numbers in place. Whether you are after a traditional bank loan, a small business loan (SBA loan) or a personal loan, and it may take some time to get the funding you need. You may also find success in presenting your business plan before a committee of investors, or even by partnering with a co-owner to off-set the start-up cost.

The outlook is good for new restaurant owners and operators in 2011. With the right funding strategy, an operator can see success even on the edges of a tough economy.