As consultants, W&W frequently receives calls from people who want advice on how to finance a restaurant.
Generally speaking, there are many ways to finance a restaurant business. By far the most traditional way is to finance through a lending institution with a possible SBA guarantee. The major difficulty here is being able to qualify for the business loan. Typical requirements are that the applicant will need to put up 20% to 25% of the project cost and have one to one collateral to cover the 75% to 80% of the amount being financed. In other words if you are borrowing $400,000; you will need to have $400,000 in solid collateral to secure the loan. However, no matter how strong your collateral may be, a bank will not make the loan or will the SBA guarantee it unless you business plan makes sense to them. The way that an SBA loan works is that they are guaranteeing 80% of the loan. Since, you are required to put up at least 20%, the bank has no risk. Obviously, banks will prefer an SBA guarantee unless you have an extremely strong relationship with your bank. The downside to you on an SBA loan is that you will pay additional loan points for it. The upside is that an SBA loan will generally give you a much longer period to amortize your loan with no pre-payment penalties. This can help your monthly cash flow by having a smaller loan payment.
Several years ago, my company was contacted by a young man who had enjoyed several years of successful restaurant management experience. He had a great idea for a restaurant and a lead on a strong location. Unfortunately, he had none of the requirements necessary to attain financing and no possibility of family financial help.
I told him that he would have to finance his dream in a more creative and perhaps nontraditional way.
Because of his friendly & pleasing personality the young man had made contact in the restaurant he managed with several successful business men, and felt that he could contact them for financial help. I advised him that realistically to attract anyone to invest in his venture, he would need a buttoned-up business plan, complete with sales projections, and showing a solid return on investment.
A Limited Partnership was created with our client as the General Partner. His investors would be the Limited Partners, and as such would have no liability other than the cash they invested. As the General Partner, our client would be responsible for all the company’s liabilities. However, on a more positive note, as the General Partner he would also have complete control of operational and business decisions.
In order to make the investment attractive, the business plan would first have to sell investors on the restaurants concept, and strong financial projections. Financial projections were based on the locations demographics and our client’s restaurant management experience. Based on the Business plan projections the project appeared to have every chance of success.
A restaurant investment is considered to be risky. Therefore the investment plan would have to offer an aggressive return on investment. The plan that we devised for the client consisted of the following: the investors would put up 100% of the needed cash and, in return, receive 80% of the equity. The client, as General Partner, would initially have a 20% ‘founders’ stock. The investors’ financial return was based on a time factor for doubling their money. They would receive an ongoing payment equal to 15% of their investment after two years, if they had not doubled their initial investment by then. When they had doubled their initial investment, the ownership would then be reversed and our client would own 80% and investors would own and receive 20% ownership.
Obviously there was great incentive on the clients part to make the restaurant successful — and as quickly as possible. By hard work and good fortune our client was able to double the investor’s money within the first year of the restaurant’s operation. Also, because the investors financed 100% of the venture, the company had no bank loans to amortize and interest to pay.
Contact Us for advice or assistance in how to finance your resturaunt.