You’ll know by now that most restaurants don’t achieve profit within the first year. In most cases, businesses owners must secure finances from elsewhere to cover rent, renovations, equipment, staff wages and other operating expenses. There are a few ways to do this, depending on your circumstances.
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Look to venture capital
Venture capital firms buy shares in young or starting businesses in exchange for a cash injection to help with expansion. It’s a popular avenue for funding because it gives owners room to grow and innovate without having to worry about running out of cash.
Many of the restaurant chains we know and love today wouldn’t be here without the help of venture capital or private equity. It plays an important role in the progress of any industry, let alone hospitality. Is it the option for you? Let’s take a look at the pros and cons of venture capital for restaurants.
Pro and cons of venture capital
- Gives you breathing space—VC firms provide a generous cash injection, giving you more freedom to grow and innovate without having to worry about going broke.
- Reduces personal risk—With an external stakeholder funding you, not all the risk of restaurant expansion lies on your shoulders.
- Guidance, as well funding—most VC firms provides managerial consulting to guide your business in the right direction.
- You already need to be well established to be taken seriously—if you’re a single location restaurant, venture capital may not be the route for you. Most VC investors prefer to invest in restaurant chains where there is less risk. Without a solid growth strategy and business plan, you may get overlooked.
- You have to give up some control—selling equity in your business you give external stakeholders more say in how the business is run.
- Opposing visions—it’s important that both you and your investors share the same values, beliefs and objectives to avoid running into friction later down the line. For example, some private investors may value short-term growth over long-term development, which could go against your own goals.
- It’s a gamble—VC firms take a gamble on your business’s growth and do so because they expect to see above-average returns. Therefore it’s worth asking whether your business is currently in a position to promise those kinds of returns.
Take out a business loan
Another way to secure funding for your restaurant expansion is by taking out a business loan. Before a lender will extend a loan to you, you have to prove that you’re already in good financial standing and that you’re able to pay it back without difficulty. Before taking a business loan consider carefully the pros and cons.
Pros and Cons of a business loan
- Provides cash flow—If you’re still a relatively small business one of your biggest cash flow issues may be irregular revenue streams. A business loan provides you with a cash injection to pay for new equipment, employee wages and other business expense you might not have cash on hand for.
- Maintain ownership—Taking out a business loan is often treated as an alternative to selling shares of equity in your company. The big upside of this is that you don’t have to hand over the wheel to investors. You’re free to pursue your business as you please because you’re the sole stakeholder.
- Access large sums on money—If you’re still relatively new to the business world, chances are you don’t have many contacts who to can help you raise funding through venture capital, for example. Plus this avenue is risky for the unacquainted. Therefore a business loan is a relatively low-risk way of accessing a large sum of money to cover your start-up costs.
- Extensive paperwork and application process—Institutions give loans based on your company’s ability to pay them back. For that reason, the application process for any loan requires a lot of paperwork. And we mean a lot of paperwork; think two to three years of tax returns and income statements. If you’re not a fan of drawn-out bureaucratic processes a business loan may not be for you.
- Lack of flexibility—You never know how you’ll perform in your first year. Taking a business loan can be risky due to lack of flexibility – you have to pay a set amount back within an agreed-upon time frame regardless of how well your business is doing.
Start a crowdfunding campaign
Crowdfunding involves raising money from the public through donations on one of many crowdfunding platforms. It’s a viable alternative if your bank rejects your application for a business loan, or if you just want a less admin heavy way of securing funds.
It can also inspire customer loyalty before you’ve even opened because you can reward doners with free meals (that they can buy in advance), and even incentivise larger donations with offers of private parties and company Christmas dinners.
Pros and cons of crowdfunding
- Fast and cheap way to raise finances—compared to more traditional avenues for funding, crowdfunding is relatively straightforward with low upfront costs.
- It can be a form of marketing—crowdfunding can also serve as a marketing tool for your new restaurant location, attracting the interest of investors, your customers, and the community.
- You can test the public’s reaction—crowdfunding can be a way to gauge how the public feels about your restaurant expansion. If it’s well-received, you know you’re on the right track.
- It’s all or nothing—if you don’t receive your required amount through donations, that money will go straight back to investors and donors.
- It can be resource-intensive—Despite their low upfront costs, building up interest in your campaign can use up a lot of time and money you may not have at this stage.
- You could risk your reputation—it’s unfair but true. A failed crowdfunding campaign could tarnish your business reputation for good.
Tips for setting up a crowdfunding campaign
- Work out what you need—If you don’t reach the goal, you don’t get the money. Therefore it’s important to work out exactly how much you need to raise and determine whether it’s a realistic amount to secure from crowdfunding.
- Get the message out there—People can’t fund your next restaurant if they don’t know it’s opening. Use social media platforms, media outlets or your email newsletter to get people excited about your crowdfunding campaign. Once the message is out there, keep people updated about how the campaign is going.
- Be honest and transparent—People aren’t going to give you money if they don’t know exactly what you’ll do with it. Outline in detail how you’ll use the crowdfunded money, and how it will benefit your customers and the local community.
- Have a backup plan—The hard truth is, your crowdfunding campaign may not work. For that reason, it’s important that you don’t put all your eggs into one basket. Have a plan B to fall back on in case your crowdfunding doesn’t go the way you want it to.
Get funding, get ahead
If you want to raise your restaurant business to the next level, securing the funds is crucial. Make sure you consider your option carefully and choose a path that suits you and your enterprise. This article is meant as an overview and does not constitute official financial advice.
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