One of the first things you’ll need when starting your new restaurant business is money. Most new restauranteurs struggle with this because the kind of money needed for most startup restaurants seems impossible to get.
It’s not uncommon for a business owner to need several hundred thousand dollars up-front. If you’re buying into a popular franchise, you might need a million dollars or more. Here’s how to raise the money.
#1 Cash Savings
If you’re lucky enough to have cash in the bank, then this is an easy “win.” Use as much of your cash as possible because financing a business gets expensive. If you fail, then you’ve only lost your own money. Once you start borrowing, you have to be more sure of your ability to succeed.
#2 Traditional Bank Loan
For most business owners, this is where they will start looking for funding. A traditional bank loan isn’t easy to get though. You need to prove to the lender you’re able to open and operate a restaurant. Bankers know most restaurants fail within 10 years. While it might not be as high as a 90% failure rate (like you commonly hear online), it can be as high as 75% depending on the niche you’re operating in.
#3 SBA-Backed Loan
An SBA-backed loan means the federal government is backing your loan. In other words, the loan is insured, which puts lenders a little more at ease since they have a reasonable assurance the loan will be paid off, even if you don’t make it.
These loans aren’t easy to get, and you have to qualify by being turned down for regular financing.
#4 Asset-Based Lending
Asset-based lending means your inventory is used as collateral for a loan. You may or may not recognize this as a form of factoring. A lender gives you money in exchange for an equity stake in your restaurant. Because restaurants don’t have much in the way of assets, the lender secures the loan with your inventory. You may get as much as 75% to 85% of its value. The downside is these loans often come with a high-interest rate.
#5 Life Insurance Loan
If you have a cash value life insurance policy, you can get a loan to start your restaurant business. This is how Ray Kroc got McDonald’s off the ground, and it’s how Foster Farms was able to get its operation going. Your life insurance company will lend you up to the value of your policy, and the interest rates tend to be rather low. Best of all, you can repay the loan on your terms.
#6 401(k) Loan
There is a little-known way to finance your restaurant business using a 401(k) plan. If you already have a retirement plan, and it’s well-funded, you may be able to use that without cashing it out and paying a penalty. The process is relatively straightforward. Various provisions in the Employee Retirement Income Security Act and IRS tax code allow you to invest a portion (or all) of your retirement savings into a business. You must be active in the business to do this though so it’s not for absentee business owners.
The first step is to set up a new C-Corporation. S-Corps and LLCs aren’t allowed. Secondly, you need to set up a new 401(k) to own your new restaurant business. You need to explicitly provide for the acquisition and holding of your business inside the new retirement plan. This is normally done through qualified employer securities (stock). This is why having a C-Corp is important. Without it, you don’t have the shares to give to your retirement account.
Rollover your existing 401(k) plan (or IRA) and have the retirement account buy all of the shares of your new company. You can invest however as much as you want into the new business without penalties. You can also make investments over time into your business. You can use the money in your 401(k) for ordinary business expenses only.
Starting a new restaurant business can be difficult, but it’s not impossible. With all of the funding options out there, you should have no trouble finding the money to get up and running. All you need is some creativity and maybe a little luck.