Creative finance options for smaller restaurant companies

Published Nov 20, 21
4 min read

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Some restaurants or hotels are preferred during certain months due to the season, weather, affordability of flights, changing trends, etc. Say your restaurant is located in the basement of a chic office building and offers quick lunch and dinner options for the working customers, has a delivery service and welcomes people unwind after a long workday.

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One winter, as the restaurant prepared for the large crowds, the management was surprised to find that the number of patrons had dwindled.

Opening up a business for the first time in any industry is difficult. Opening up your first restaurant is even harder. Restaurants are capital-intensive and expensive to build out, and the stabilization period is long and uncertain. Compared to experienced business owners with a financial history, first-time restaurant owners will have limited access to sources of capital.

Building Up a History The biggest hurdle for first-time business owners is their lack of a track record. Even if you’ve had experience running someone else’s business day-to-day, on paper, you have never been an owner. For institutional capital sources (i. e., banks or private investors), there is nothing to underwrite what you have done in the past.

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“They need a proven record of success before they can access the more attractive non-equity capital and loans,” he says. “But it can be hard to find capital outside of those non-institutional sources.” Most first-time restaurant owners rely on two main sources of capital for their first business: personal resources and capital from friends and family.

“People want to see that you have everything on the line,” says Zalud. “Someone who has risked their livelihood, who has skin in the game, is showing that they are really committed to making the business work.” Most restaurateurs start their business with at least some of their own capital.

After that, they can think about their debt-serviceable assets, such as a car or home refinancing. Some restaurant owners eye their 401(k) as a possible personal resource. ROBS (Rollover for Business Startups) transactions are marketed by some companies as a way to structure an investment within your 401(k) without the fees and taxes.

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Most finance professionals would advise caution, but if you really believe in what you’re doing and are determined to use some of your funds from your 401(k), it is better to take out the money you want, pay the penalty fees and taxes, and use it. ROBS transactions are a risky and complicated approach to using 401(k) funds.

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Your first private investors will be people who know you personally. This can be “a very friendly source of capital,” according to Zalud, with negotiable repayment timelines or creative dividends that are more flexible than traditional capital sources. Zalud offers some advice about transparency when it comes to personal relationships and investment.

From the beginning, the agreement terms and possibility of loss should be clearly understood and laid out by both parties. Friends and family can also provide another valuable resource: introductions to investors a degree or two outside of your network. First-time business owners may be able to find substantial private investment, but these sources will most likely come from a personal connection.

For example, rather than offering a stake in the company, you could offer to pay back friends or family on a quick timeline with a good interest rate. Some businesses also add an “equity kicker” of a profit share, referred to as “carried interest” in the industry. Investors rewarded with the profit share don’t actually own equity; rather, they share a slice of the profits on top of the equity in your company.

But most business owners find it best to keep outside equity in the single digits. Mistake #2: Underestimating working capital First-time restaurant owners may focus on the capital needed to open their doors, but they should also be planning for working capital once the restaurant is operating. Zalud recommends that first-time restaurants include working capital in their initial capital projections, “enough to cover them for quite some time.” A fund of working capital is “essential” for fledgling restaurants, says Zalud.

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To learn more about restaurant financing, tax and accounting, contact Jessica Hussain. .

While the Canada Emergency Commercial Rent Assistance (CECRA) program might provide some restaurants with relief, rent obligations continue to be a challenge for many: At least one out of five independent restaurant operators are dealing with a landlord who is not willing to provide rent relief, either through the CECRA program or some other arrangement.