Running a successful restaurant is never easy, and expansion might seem like a pipe dream for hard-working business owners just trying to get by in an ever more competitive market. But it needn’t be; very few have the capital on hand to expand a restaurant or add new locations, yet many still do. How? By securing proper funding. There are plentiful financing options for restaurant owners looking to grow their business and their success; you just need to know where to start!
Step 1: Prepare for Expansion
Before you can find the right funding package for your expansion dreams, you have to consider what you’re aiming for, and how best to achieve it. Crucially, you need to:
- Choose your timing wisely. Real estate prices, interest rates, industry factors and many other considerations will affect when the best time is to start your expansion journey.
- Consider all your expansion options. Expansion can look different for different restaurants; it may mean extending an existing space, or opening a new location. It may mean a food truck, or alternative catering options.
- Prepare a business plan. A well thought-out business plan is vital, both in securing some forms of funding, and in setting goals and strategies for your expansion. For more on how to create a good business plan and get loan approval, read our article on the topic, here.
Step 2: Choose the Right Funding
Now you can start figuring out the best way to fund your goals. The following are some of the most popular financing options for restaurant owners:
Governmental Small Business Financing
Depending on your business’s size, you may be eligible for a government-backed small business loan. The benefit of this type of loan specifically is that the eligibility requirements are less stringent than with a commercially-backed loan, and interest rates are competitive. The loan funds can be used for any legitimate business purpose, so whether your revenue streams are inconsistent, you need help covering new staff wages or supplier costs, or you need capital for equipment or premises, a loan can help. And unlike with private investors, you get to retain complete control of your business by using a loan.
However, borrowing amounts can be smaller with a government-backed loan than with a commercially-backed loan, and it’s vital you are able to make the repayments to prevent damage to your credit and finances.
Loans are not the only benefit offered to small businesses by the government; remember to keep your eyes open for their other offerings, which include tax credits, wage subsidies, grants and more.
In direct comparison with a government loan is a commercial loan – that is, a business loan from a bank, credit union or online lender. Commercial loans are available in large and small amounts, and are potentially cheaper than some other forms of borrowing. And as with a government loan, you can use the funds for any purpose.
However, the eligibility requirements for a commercial loan can be tough, and they are harder for new businesses or those with low credit scores to access. And the lender will want to see a detailed, researched plan for expansion, to ensure you will be in a position to make repayments.
Line of Credit
A line of credit is a great way to access a flexible amount of funding – perfect if you’re not sure how much you might need for your expansion plans. You can use as much or as little as you like, up to a preset limit. You only pay interest on what you use, and can repay more flexibly than with a commercial loan. In addition, you can re-use the line multiple times.
This level of freedom is great if you need varying amounts of money over time, are unsure of your budget or needs, or simply want a safety net. But be aware: this form of borrowing is typically more expensive than a traditional loan, so it’s not a great way to access large amounts of capital or long-term funding.
If you’re looking for new equipment as part of your expansion, an equipment loan can be a great way to go. These loans are usually offered by the vendor or manufacturer of the item in question, and are secured against the equipment itself, so no collateral is needed.
An equipment loan is relatively easy to access and turnaround times are fast, so you can potentially get the machinery or technology you need right away, and pay it off over time. This is one way restaurant owners can ensure maximum efficiency of their expansion from day one. It’s important to note though that you will be liable for all maintenance and repairs of the equipment in question, and that sometimes equipment loans can outlast the life of the equipment.
If your expansion plans include opening a new location, a property loan to fund the purchase of land or commercial premises is a sensible option. Few business owners have the luxury of buying new premises out-of-pocket. A commercial mortgage will give you access to large sums of money (usually up to 75% of the property’s value), with relatively low interest rates and a long repayment term. However, mortgages are some of the hardest loans to qualify for, so for this to be a viable method for your business, you need to have decent credit and strong finances.
Merchant Cash Advance
If you want a quick, flexible source of funding, then a merchant cash advance (MCA) may be an option. This is essentially an advance against future credit card sales, which is repaid as a percentage of those sales, rather than as a fixed amount at set times. This means that your rate of repayment depends on your success – perfect for those unsure of their new revenue stream, or wishing to protect their cash flow. The funds released with an MCA can be used for any purpose, and no collateral is required. They’re easier to get than traditional loans, but are also usually more expensive.
Lastly, depending on your business’s situation, customer base, and your professional network, private funding might be an option. This can come in a few different forms: crowdfunding, venture capital, or an angel investor. The benefit of this type of funding is that it’s usually non-repayable; the downside is that you usually have to give something valuable – like equity – away to secure the money. Finding a private investor can be tough – though it does also mean that you’re sharing the risk of expansion with a partner – and for crowdfunding to work, you need to have a really solid customer base to begin with.