Real estate, equipment, inventory, technologies, wages, and insurance are some of the many costs you’ll need to cover when starting a restaurant. Together, those costs can be substantial, and to a person with limited cash on hand, they can seem nearly impossible to cover. Fortunately, there are loans and other ways to raise the money you need for your restaurant.
In this article, you'll learn about the financing options you can use to cover your costs.
How can I raise capital for my restaurant?
There are quite a few ways to build up the cash you need to cover your restaurant's startup costs. These include:
Checking and savings accounts
Many business owners use this pool of cash before considering any other cash sources. Here's why: It’s the easiest to access and use to fund a new business idea.
If you have cash available in either of these kinds of accounts, calculate how much you’re willing to part with to start or grow your restaurant. You can contact a banker for help with these calculations.
Do you own stocks, bonds, or mutual funds in a taxable investment account? You might use them to raise capital for startup. Here are two options:
By selling your securities, you could raise some or all the cash you need for your investment. Some sales can result in mutual fund fees, broker commissions, and the realization of capital gains. Be sure to speak with a qualified investment professional before choosing this option.
Borrow against them.
You could also consider a portfolio loan (sometimes called a pledged asset line) to raise the cash you need. Through a portfolio loan, lenders use your investment savings as collateral and allow you to borrow up to 70 percent of the value of your accounts.
Because these loans are backed by collateral, they tend to have low interest rates and are often easy to qualify for, provided you can meet the funding minimum your lender requires. You can learn more about portfolio loans in this guide:
Again, be sure to speak with a banker to navigate the tax consequences of selling your securities and the risks of borrowing against them.
Personal lines of credit
Lots of owners take out a line of credit to cover early costs. A line of credit provides access to a preset amount of cash you can borrow and repay according to your lender's terms. Many banks allow borrowers to set up a personal line of credit to use however they see fit, which can include covering the costs of a new restaurant.
Lines of credit involve some degree of risk. If you fail to repay the funds you borrow, you could negatively impact your personal credit score. You could also reduce your odds of attaining favorable terms on any loans you need to take out in the future.
If you're interested in this form of funding, you should contact a local bank or credit union or work with an online lender.
Have you been contributing to a retirement savings account? You could use those funds to cover some or all of your upfront expenses. There are several ways to access the funds in your retirement savings accounts. However, you should note that any use of your retirement savings introduces risk, and in some cases, tax concerns.
To learn more about using your retirement plan to cover startup costs, check out this guide:
Do you own a home or other properties? You may be able to borrow the equity, the difference between what you owe and what the property is worth. Many lenders offer home equity loans with favorable terms and few restrictions on how the funds can be used. The drawback is that these loans require you to put up your house as collateral. This means you could lose your home if you fail to repay the loan.
Be sure to speak with a banker before considering a home equity loan to cover your business’s costs.
Cash-out mortgage refinance
Another option for property owners looking to secure funds is mortgage refinancing. With a cash-out mortgage refinance, you have the option to pocket the difference between what you owe on a property and 80 to 95% of the property’s appraised value.
Rates and closing costs can be higher with this option than with a traditional refinance, so this option should be considered carefully before moving forward. Speak with a banker before considering a cash-out mortgage refinance to cover the costs of your startup.
You may also consider a second mortgage on a property you owe to cover some of your business costs. Second mortgages are structured very similarly to a traditional home mortgage with clear repayment terms and interest requirements.
But here's something to note. It can be difficult to find a lender willing to provide this type of financing. Most banks view second mortgages as higher-risk investments of their money. Those that offer them tend to charge higher interest rates than they might for a traditional home mortgage. You should speak with a banker before considering a second mortgage.
Many restaurant owners apply for term loans to cover part of their startup costs. Term loans, which can be attained through a bank, credit union, or online lender, often have favorable terms and long repayment schedules. However, they can be difficult to qualify for, especially for borrowers with less-than-perfect credit.
You can learn more about term loans and their qualifications in this guide:
SBA loans are one of the most commonly used tools to cover early-stage costs. Named after the Small Business Administration that guarantees them, these loans allow small business owners to finance a large portion of their startup costs. They can also cover working capital expenses, equipment needs, and building acquisition or improvement costs.
The SBA offers three kinds of 7(a) loans to owners to cover up to 90 percent of their startup costs, working capital, and equipment needs. They also offer 504 loans for the purchase of existing buildings, the purchase of land or land improvements, the construction of new facilities, the renovation of existing facilities, or the purchase of long-term machinery.
To learn more about SBA loans and their requirements, read this guide:
Many lenders offer asset-backed loans to owners willing to leverage their restaurant's assets. Through these loans, you can finance your business’s inventory, machinery, non-mortgaged real estate, or other tangible assets to access fast funding.
Asset-backed loans are often easy to qualify for and attain, even for borrowers with less-than-perfect credit. To learn more about asset-backed financing, check out this guide:
Rather than buying and leveraging the equipment your restaurant needs to operate, consider leasing large-ticket pieces of equipment. Many equipment wholesalers and distributors offer five-year leases and provide the option of purchasing the equipment at the end of the lease period.
You can learn more about this option in this guide:
Thinking of buying rather than leasing your site? You may want to consider a commercial mortgage. This form of loan can be used to purchase an owner-occupied office building, retail center, warehouse, or other commercial property.
Commercial mortgages differ from residential mortgages in both terms and the amortization period. Commercial mortgage terms often range from five to twenty years, and the amortization period extends past the term of the loan. Loans structured this way usually require equal monthly installment payments for the life of the loan and a final balloon payment.
These loans can require higher down payments than SBA-backed options, and they can be slightly more difficult to attain. Further, many lenders require borrowers to guarantee the loan, especially if the borrower is an individual or an entity with no borrowing history.
You can learn more about commercial mortgages in this article:
Commercial bridge loan
A bridge loan is a more expensive option for covering commercial real estate costs and other high-ticket items, including large batches of inventory, renovations, or repairs. However, they bring some advantages. These loans can often be attained quickly and relatively easily, even for borrowers who have less-than-perfect credit.
Bridge loans are collateralized. Because of this, lenders tend to worry less about a borrower’s credit history and credit score. However, most will still require a credit check for loan approval.
To learn more about this option, read this article:
Commercial hard money loan
Some non-bank lenders offer commercial hard money loans that are secured by the borrower’s property. This short-term option allows owners to buy a property quickly, with flexible terms, and often without checks to the borrower’s credit history. However, the interest rate on these loans is often high. Because of this, many owners view these loans as a last-resort option and refinance the loan into a mortgage at a later date.
Some online lenders offer hard money loans, but most small business owners turn to friends, family members, or local real estate investors to secure this form of funding. Be sure to evaluate the terms of a hard money loan carefully before proceeding with this option.
Learn more about this option and other commercial real estate loans in our guide, Small Business Financing 101: How Commercial Real Estate Loans Can Help You with Your #Location Goals.
If you can’t raise enough cash through other means or you aren’t comfortable tapping into a significant portion of your savings or equity, you could bring on a partner who can help you cover your initial costs.
Of course, there are risks and benefits to partnership that should be considered carefully. You can learn more in this guide:
You might reach out to venture capitalists or angel investors to attain the money you need to ramp up operations. Some invest in the early stages of a promising startup, but many prefer to see a proven concept before providing the capital its owners need to succeed.
To learn more about venture capital and angel investors, visit these guides from our Small Business Financing 101 series:
Need help deciding?
Interested in working with a banker? Check out our favorite options:
Lots of work goes into starting a restaurant. We can help you with every action you need to take. Start with our restaurant guide. Then, log into your owner’s portal for free, personalized guidance that will help you make your venture a success.