The process of opening a restaurant from start to finish can be, and should be, an arduous one. It requires a tremendous amount of research and determination because there is a whole array of things that must be done simultaneously in opening a restaurant.
As described in my book, “So You Want to Open a Restaurant! A step by step to opening your own restaurant”, it all begins with a business plan. The progressive steps begin with your restaurant concept, and the consumer category that it fits. It is then followed by detailed development of the concept.
Key to making your dream come true is the ability to properly finance your restaurant. Unless you have the personal financial means, conventional or venture capital financing will be necessary.
In the development of a comprehensive business plan, you will have determined your cost. The cost will include your FF&E (furniture, fixtures, and equipment). All three will be determined by your concept and menu. The building cost will also be interrelated to your restaurant concept.
Once you have determined these cost, your must then estimate legal, accounting, licensing, and contingency operating capital, and calculate that figure into your business plans financial return on investment projections. You are then ready to pursue financing.
Most conventional bank loans for a restaurant will require an SBA guarantee. Not all banks are SBA approved and most banks will shy away from first time restaurant start-ups. SBA and bank loan requirements will be the same. Typically, the SBA will guarantee 80% of the loan. They will require that the borrower fund 20%, and have one to one collateral on the 80% borrowed.
Additionally, the approval for a loan will be determined by the veracity of the business plan, and the demonstrated business acumen demonstrated by the borrower. Regardless of the individual’s financial strength and collateral, if the business plan does not make sense, and the borrower has no business experience, the bank will not make the loan.
A national restaurant franchise start-up will typically have a better chance for successful bank financing because they have a demonstrated history of success.
Venture capital investment by individuals is normally the easiest way to finance a start-up restaurant. Collateral will not be required but an aggressive return on investment arrangement verified by realistic projections in the business plan will be necessary.
A limited partnership with no contingent liability to the investor is normally the preferred
legal partnership entity. For a first time independent restaurant start-up, this will normally be the only outside financing option available.
By Tom Wilscam. W&W Restaurant Group, a restaurant consulting company specializing in restaurant franchise type systems for start-up restaurants, and franchise consulting.