Restaurant funding 101: How to raise restaurant capital

Strategies for funding your restaurant dream: From finding angel investors to applying for loans, here's how to launch your restaurant successfully

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TableCheck

May 2, 2024 - 3 min read

Restaurant funding 101: How to raise restaurant capital

Many individuals nurture the dream of opening a restaurant, drawn by a myriad of motivations. For some, it's a legacy passed down through generations to run a long-established restaurant or add a new gem to the family legacy. Others are driven by an unwavering passion for food, seeking to tantalize taste buds and create memorable dining experiences for guests. Some aim to shake up the local scene such as restaurateurs who want to introduce Zero-waste or deconstructed cuisine and other new ideas. to the local dining market. Some are enchanted by the idea of being a restaurant owner, taken in by the glamour that comes with it. For many creative souls, a restaurant is a stage upon which they can realize their creative dreams of creating a medley of tastes, atmosphere, and experience.

The viability of any ambitious restaurant project hinges on securing adequate capital, whether it is the first "farm-to-table" concept restaurant or a fast food haven. Here are some ways to get capital for a restaurant: 

1. Applying for a restaurant business loan: Tips and tricks

Before asking for a bank loan, it's essential to have a business plan ready and identify the fundraising goals. Restaurant owners should research every bank option available and study the terms of the loan, services, and interest rates they provide before committing to one. Sometimes, choosing a bank near the vicinity of the restaurant is convenient in case there is a need to go back and forth and negotiate the terms of the deal. Hospitality operators should keep in mind that banks are wary of lending to first-time hospitality operators, so it's advisable to have some funds, to begin with, to finance the new business.

2. Borrowing from friends and family

Individuals can use their own money or borrow from friends or family members. People within a person’s social circle are likely to lend money with zero or lower interest rates with a more flexible duration of repayment. That said, accepting loans or donations from family or friends is always a tricky situation to be in especially when payments get delayed from the borrower. In addition, if the amount is large, it may be regarded as a gift, so it is necessary to prepare an IOU to avoid taxation.

3. Partnering for success: Building a strong business partnership

A business partner encompasses various roles and expectations. While some partners may actively participate in day-to-day operations, others may primarily contribute financial backing, and some fulfill both roles. Collaborating with partners distributes the burden of financial obligations and reduces individual risk. However, to foster a harmonious partnership, it's essential to define responsibilities clearly from the outset.

Moreover, even with defined roles, disagreements may arise regarding crucial decisions such as hiring staff or determining the restaurant concept or branding. Clear communication and having a common vision right from the beginning are pivotal in navigating such differences and maintaining a cohesive partnership.

4. Leveraging government support for restaurant ventures

Different countries have different schemes when it comes to supporting the F&B industry. The interest rate varies, however, the establishment may have to share regular reports with the government.  Furthermore, getting subsidies can boost a restaurant's reputation and could help when applying for funds from private banks in the future. There are many drawbacks to these subsidies, including their limited availability and the requirements for applying. Moreover, subsidies typically involve retrospective disbursement, prompting the need to have upfront funds as owners need to use personal resources before receiving the subsidy.

5. Angel investors: Securing investment from seasoned entrepreneurs

An angel investor is usually an entrepreneur who has launched successful and established business ventures in the past and is looking to finance a new business in exchange for equity. The terms of how the investor will get paid could vary from asking a 10% of profits for 10 years to a 20% share if the restaurant gets sold.

Hospitality operators should make sure that the business model and concept of the restaurant are solid before pitching to an angel investor as they usually get involved at the early stage of the business. As a rule, angel investors will only likely finance the business if they think that it has potential value and a chance to be successful.

To find an angel investor, it's best if business owners conduct preliminary research on restaurants in advance that have been backed by this type of investment and check out angel investment platforms online.

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Types of capital costs needed to launch your restaurant

When raising funds from third parties, it is crucial to have a repayment plan in place in addition to a funding plan. Owners should assume that monthly repayments will be made from profits. Additionally, they should determine profits using the sales forecast and income and expenditure plan. Then, develop a repayment plan around these projections.

1. Funding plan: Determining how funds will be raised and allocated

The funding plan outlines initial costs like lease deposits, equipment purchases, and ongoing working capital needs such as salaries and groceries. Working capital is the money required to meet daily operational expenses. The funding plan should also detail how funds will be raised through personal investment, loans, or partnership, with a clear breakdown of amounts. This structure ensures transparency and clarity for stakeholders in understanding the financial requirements.

2. Income and expense plan: Keeping an eye on the future 

An income and expense plan must be carefully studied for a strategic outlook of the future. Making sales projections, determining future expenses, and calculating how much profit it will make should be studied before even starting the business. This can be calculated using the following formula. Expenses include labor costs, tenant fees, and interest payments.

  • Profit = sales (cost of sales + expenses)

When forecasting income and expenses, restaurant proprietors should base their overall judgment on the business environment, the state of the industry, the state of the competition, and changes in equipment capacity and prices.

3. Set up a repayment plan: Fulfilling financial obligations towards lenders

Hospitality owners should utilize the projected profits from their income and expenditure plan to devise a specific repayment schedule, determining monthly repayments and the timeline for clearing the loans. Remember that restaurant profit is profit minus loan payments. Restaurant operators should allocate a substantial budget for repayment because things will not always go according to plan. For example, a poor nationwide onion harvest season could result in higher onion prices, increasing supply expenses.

4. Make a sales forecast

Sales forecasts are important when planning income and expenditure. The way sales forecasts are made varies depending on the type of industry. For service businesses such as restaurants, the following formula should be used.

  • Sales = customer spend x number of seats x number of turnover x seat occupancy rate.

The cost per customer depends on the time of day, while turnover depends on the time of the day and the day of the week. Therefore, separate calculations should be made for daytime and nighttime, weekdays, or holidays.

It is also necessary to pay attention to the seat occupancy rate. The seating occupancy rate is a figure that shows how much seating is occupied; if two people occupy a four-seater, the seating occupancy rate is 50%. Even if the turnover is high, if the seating occupancy rate is low, sales will fall accordingly. When making sales forecasts, restaurant operators should consider mechanisms to increase turnover and occupancy rates.

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