“My partner and I are having problems securing funding for our restaurant. It is a new start-up with a really excellent deal in terms of our opening costs, lease agreement, location and base clientele. But we do not think anyone is even reading the business plan and giving it consideration. We even have a government planner recommending it. The first thing we hear is that it’s a restaurant with a 52% failure rate. Are there any banks or funding places in Canada that actually like restaurants and would give us a chance?”
Tony Pimentel, Advertising and Production, Say Communication
Your problem is definitely NOT an unfamiliar one.
Traditionally, banks have always shied away from financing restaurants because of the age-old adage that it takes 3 years before a restaurant will turn its first profit. Add to that the current economic climate, where many banks were caught holding the bag with sour investments in hi-tech start-ups and with VC’s more discriminate than ever, banks will only be worse!
Despite this, there IS hope. My suggestions:
- Traditionally, other source of financing can be: family, retirement plans and other investments. However, I assume you have exhausted these possibilities. You may try a restaurant co-op where you pay a membership fee and are part of a greater collective and share in the benefits i.e. a voice on government imposed legislation, national marketing efforts, etc. Although they may not directly finance your venture, they may be able to provide additional funds to offset other monthly expenses reducing overall liabilities (in the mind of the bank). Moreover, as part of a larger organization, you add instant “size” and “organization” to your venture … adding to your credibility as a viable prospect.
- Banks (and other financiers) like guarantees and other assurances that revenues will be there to [meet] the monthly commitments. Without knowing the specifics of your business plan, try using a marketing approach. For example you can take advantage of your location, type of clientele, nature of restaurant etc., to try and secure regular and timely catering events (lunches, seminars, meetings, staff parties, etc.) to demonstrate a consistent cash flow. Set up a “meal to go” program where “subscribers” pay a monthly fee for 3 regular meals each day for a month.You may even try to ally yourself with a local tour operator offering where tour goers receive a lunch (covered in the price of the tour).
If you can secure enough subscribers or corporate commitments (vis-ÃÆÃ -vis a signed contract) enough to meet your basic fixed costs, this is like money in the bank to the bank (no pun intended).
Detail this part of the plan in a one page “business ready” reference section that you tease the reader at the beginning in your Executive Summary.
Try a different marketing angle such as “We need money to feed our customers! Please help! This is a fresh approach to bankers and grabs their attention — hopefully long enough to read your plan. It also suggests that your restaurant already has a history and an existing clientele (again, another important feature for a bank).
- Re-visit the amount of financing required: Do you need the entire amount up-front? Is it mostly for asset acquisition (banks like to know they can take something back in lieu of payment), is it primarily for working capital (perhaps minimize this amount with the contracts described above)?
- Take a classified ad in the paper and ask for “silent partners” interested in helping establish a “unique restaurant concept”.
These are just some possible ideas. You have to sell yourself and your restaurant. Use a marketing angle with potential financiers as your audience and develop a pitch and advertising program aimed at getting that sale — i.e., start-up capital.
That’s it for now! Good luck.
Maurice Julien, Strategy Consultant
The business plan probably isn’t taken seriously because of the lack of “marketing content”. Most restaurants fail due to poor or no marketing. A lot is spent on facilities, decor, etc. without any thought given to marketing. Strengthen your business plan with a well-thought-out marketing section focused primarily on two aspects:
- Promotion: Your promotion plan for the opening, and your plan for ongoing promotion
- Customer satisfaction initiatives: All the things that will make customers happy, encourage “word-of-mouth”, repeat business, and long-term survival.
When meeting with investors, focus the presentation on the marketing aspects that promote long-term survival.
Best of luck.
Name withheld by request
Probably no one likes restaurant loans, but under the right circumstances they may be available. The recommendation of a government planner doesn’t mean much to a financial institution. I would talk to relatives, the Business Development Bank and a local economic development group with lending abilities. Don’t expect to raise all the money from one source. A lease broker might also be of some assistance. You should have a good deal of equity in your fixed assets and enough cash to meet your working-capital needs. There is almost no hope of raising the funds through conventional bank financing unless you have security such as a house, a life insurance policy with cash surrender value or highly marketable securities. If you need nearly 100% financing and an operating credit and don’t have significant assets to pledge, you need to take time to build up some cash.
One of the ways to finance this type of business is through the Small Business Loan; however, you should meet the minimum requirements: good personal credit, no bankruptcy in the last 7 years and no derogative credit; have a minimum equity investment of 50% of the total cost of the project, including your hard and soft costs (e.g., soft cost: are inventory, security deposits, working capital). Then the bank will finance your fixed assets and leasehold improvements. The bank will finance equipment up to a maximum of 90% and leasehold improvements to 50 75% of the total cost. Also please keep in mind your background in the industry is very important — how much knowledge and experience you have running such a business.
This is one of the most difficult industries to finance with any financial institution. But if you meet the minimum requirements, then a bank will extend a loan to you.
Have a question for your fellow entrepreneurs? Send it to Peer-to-Peer.
Watch for another Peer-to-Peer Poll in the next PROFIT-Xtra.