Restaurant growth can provide countless opportunities for restaurateurs to expand their businesses, increase their profits, and attract new customers. However, financing restaurant growth can be a challenging task, involving detailed planning, research, and decision-making. This guide will provide a comprehensive overview of the financing options available to restaurant owners to help them secure funding effectively.
One of the most common financing options for restaurant growth is a business loan. (SBA loans, conventional bank loans or alternate financing options such as online lenders.) These loans provide funding for various restaurant-related expenses, including renovations, equipment, staffing, and marketing. Typically, these loans require collateral and a strong credit score.
a. Pros of loans:
- Flexibility: Loans can be tailored to meet the specific needs of business owners, and the terms and conditions of the loan can be negotiated.
- Lower rate of interest: Business loans often offer lower rates of interest than credit cards or other financing options.
- Builds credit score: Making timely payments on the loan can improve the borrower's credit score, leading to better loan offers.
b. Cons of loans:
- Collateral required: Business owners must provide collateral such as property, equipment, or inventory to secure the loan.
- Time-consuming process: Applying for a business loan can be a time-consuming process, requiring extensive documentation and background checks.
- Restricted use of funds: Business loans come with restrictions on the use of funds, so business owners cannot use the money for non-business purposes.
c. Case study:
A restaurant owner wants to expand their restaurant to accommodate more customers. They apply for a business loan and receive $100,000 with a 6.8% interest rate. The loan is secured by the property, and the business owner makes payments on the loan for 5 years, improving their credit score.
2. Lines of Credit
A line of credit (LOC) is another type of financing option for restaurant owners. These loans allow users to borrow a set amount of money and repay it over time, similar to a credit card. LOC loans typically have higher interest rates than other financing options, but they offer more flexibility.
a. Pros of LOC:
- Flexibility: A LOC provides the flexibility to borrow funds as needed and only pay interest on the amount borrowed.
- Easy to obtain: Lines of credit are often easy to obtain, and approval can typically be granted in as little as a few days.
- Short-term financing: LOCs are ideal for short-term financing needs, such as covering seasonal fluctuations or unexpected expenses.
b. Cons of LOC:
- High interest rates: LOCs typically have higher interest rates than other financing options, making them more expensive over time.
- Collateral required: Business owners may need to provide collateral to secure the LOC loan.
- Risk of going into debt: The ease of borrowing with a LOC can make it tempting to run up debt and struggle to repay it.
c. Case study:
A restaurant owner needs to buy new equipment and hires additional staff for a busy season. They take out a line of credit for $50,000 and use $30,000 to purchase the equipment and hire staff. Over the next 6 months, they pay back the loan, with an interest expense of $2,125.
3. Sale Leasebacks
Sale leasebacks are used to free up capital tied up in a restaurant's building or property. In these cases, an owner sells their property and agrees to lease back the property from the new owner at a set rate. This provides a quick injection of cash without the burden of paying back a loan.
a. Pros of sale leasebacks:
- Provides quick cash: A sale leaseback can provide quick access to cash, without the need to go through the lengthy process of a loan or line of credit.
- Release capital: A sale leaseback can release capital tied up in a property, allowing a restaurant owner to invest in the business without the burden of debt.
- Predictable expenses: Through the leaseback process, expenses become more predictable and eliminate unexpected expenses, in terms of property maintenance, taxes etc., and provide stability.
b. Cons of sale leasebacks:
- Reduced control: Once a restaurant owner sells their property, they cede control over a critical part of their business.
- Limited lease terms: The terms of the leaseback agreement will include lease term lengths, fees and renewal options, and could lead to long term lease financing which may not be ideal.
- May have tax implications: In certain cases, Sale leasebacks may have tax implications as the IRS views the transaction could be seen as a sale proceeds instead of a financing transaction.
c. Case study:
A restaurant owner owns their building outright and wants to access some of the equity tied up in the property. They agree to a sale leaseback, receiving $300,000 in cash in exchange for leasing the property back from the new owner. They continue to run the restaurant for the next 5 years when the lease is up, they need to decide whether to renew or not?
4. Business Plan
Regardless of the option, restaurant owners will need to show potential lenders a comprehensive business plan to prove their creditworthiness. Here are some essential tips for crafting a compelling and credible restaurant business plan:
a. Be Transparent
Be transparent about your restaurant's financial history and overall business operations. This includes income and expenses, profit margins, and any outstanding debts. Transparency is crucial to building trust and credibility with lenders.
b. Provide a clear purpose for the funding
Business owners should explain why they need the loan, how the financing will be used, and how they plan to repay it. Demonstrating purpose, intent and capability are significant considerations for loan approval.
c. Be realistic
Business owners should be aware of their credit history and their ability to repay debt. Lenders will assess credit history to determine a business's eligibility and applicable loan terms. Realistic expectations are essential in preventing an unnecessary financial burden.
d. Seek expert guidance
Business owners may find it beneficial to seek guidance from an industry expert to ensure that their business plan's details and financial projections are reliable and accurate.
e. Bolster Creditworthiness
Business owners with limited credit history or poor scores may consider taking actions to bolster their creditworthiness. Improving credit scores could increase the chance of obtaining a loan or line of credit with favorable terms.
Financing restaurant growth requires careful consideration, detailed planning, and expert guidance. The above-mentioned financing options have their advantages and disadvantages, and making informed decisions that fit the business owner's goals and creditworthiness is essential. Crafting a strong business plan, including transparency, realistic projections, and seeking expert guidance, can ultimately help restaurateurs secure financing and drive business growth. To help determine and navigate the best funding options, we at Boost Financial Partners offer a free business funding consultation that interested business owners can take advantage of. Click here to setup Free Consultation