Starting a restaurant takes a lot of capital, but there are plenty of ways you can gain investors
By Daniel McCoy
For those with a passion to be a restauranteur, there is often one thing that stops them from pursuing their dreams: Money. To start a restaurant today can run from $50,000 to $1.5 million. Many restaurateurs have chosen a less expensive route of a food truck or trailer, but even those can be pricey, and dealing with the legal and regulatory issues can be difficult. Where is the best place to find cash?
Bootstrapping, funding the business yourself, is the easiest way if you have the money to do so. Just remember, the No. 1 reason new businesses fail is lack of capital. Borrowing from family and friends is also an often-used method, but it has pitfalls. Being in business with loved ones can be tricky. Keeping the personal and business relationships separate is not an easy thing to do.
A new take on bootstrapping is using a Roll Over Business Start (ROBS). If you have sufficient funds in a 401(k), you can use the funds without suffering a withdrawal penalty. The first step is to establish a new C corporation.a Then with the assistance of an attorney or financial advisory company, establish a new 401(k). The funds can be rolled over from the previous plan for use in the new company.
This method is rather expensive to set up and does put the retirement funds at risk. Therefore, it should not be considered for investments of less than $100,000. Often, ROBS is used as the equity injection in addition to a loan or other financing.
Social media has created another popular source of money: crowdfunding. Crowdfunding means widening the financial base of your organization, requiring a smaller amount of money from a larger group of people. According to Business.org, there are more than 600 crowdfunding websites worldwide. Some of the best known include Kickstarter, Indiegogo, SeedInvest and Kiva.
There are three kinds of crowdfunding: Supporter funding, debt funding and equity funding. Supporter funding is when donations are sought to assist in the business with no real return to the supporter, except an “I had part in that” or sometimes a small reward like a branded hat or T-shirt. There is the famous story of the chef who sent a spoonful of his potato salad to anyone who invested $10 or more, and he raised thousands.
Some sites set a minimum to be raised, and if you do not meet that minimum, the funds are given back. Most charge a percentage of each donation and often an additional fee. KickStarter.com and Indiegogo both offer information on how to set up donations, rewards or perks as part of your funding ask.
Debt funding is another name for asking friends, family and others to be lenders on social media. Kiva.com is an example of a debt funding site.
Equity funding means the entity sells a portion of the company to “investors” without the need of a stock listing. There are several crowdfunding sites that offer this option, including SeedInvest and Indiegogo. These sites are often used by startups and businesses in expansion mode to fund the initial budget. Again, there are cost and minimums for these campaigns.
A large benefit to these campaigns is marketing and name exposure. If someone is a supporter, they will want the business to succeed, so the business is building a client base along with raising money.
Finally, a loan from a financial institution is still a common occurrence. It is well known that most conservative banks do not like startups and do not like restaurants, so startup restaurants fair worse. However there are ways around the stigma of startup.
Collateral not tied to the business can be offered for the business. Equity in the home, rental properties, lake homes, etc. can be used as an offset for the fact that this is a startup. Another is to have a strong co-borrower or guarantor, especially if they are willing to pledge collateral.
There are online money lenders, such as Kabbage, but lending is easier when the banker knows you and your business. Start with where you bank and develop that relationship.
No matter how you seek funding, save your money, find your site and build your plan. It’s time to get started.
Daniel McCoy has been a business consultant with the UGA – Small Business Development Center at Kennesaw State University since 2017. In his role with the SBDC, he has been a key player in more than 45 new businesses going from idea to sales, including restaurants, franchises and food trucks, and has assisted in more than $10 million in capital infusion. He has more than 20 years experience in the banking industry and 14 in the retail world, and is a Certified Professional for the Society for Human Resource Management (SHRM). For more on how the UGA Small Business Development Center can help your concept, go to georgiasbdc.org.