Restaurant capital is a key component of starting a restaurant and creating personal financial freedom. However, the challenge comes from finding the right capital partners for your new business. Therefore, it’s essential to “begin with the end in mind” and start sourcing restaurant capital in the early stages of the process since there are many options to consider. The alternatives include Bank debt (SBA and Conventional), Private Equity (“PE”), and family and friends. But, each offers unique benefits to meet your needs and can ultimately determine your success as an entrepreneur. Here are some of the primary options for raising capital for your restaurant business.

Friends and Family
When seeking restaurant capital, friends and family will often appear as the path of least resistance. However, this option has its fair share of challenges. Friends and family are a good option for experienced restaurant owners and chefs with a proven track record. Unfortunately, it is not an ideal solution for new Restauranteurs. Your friends and family may love you, but they are unlikely to put their capital into your new venture because of a common mistake many new entrepreneurs make. That is, seeking direct investment from people that don’t make direct investments. This approach puts you in the untenable position of selling the idea of direct investment as well as your new restaurant concept. The second mistake involves accepting an unconditional “maybe” as a valid response to a request for capital. If you’re familiar with the Shark Tank™, you’ve probably noticed the Sharks will either say “yes” or “no” and explain their rationale (valuation, lack of current revenues, among others). The Sharks seldom use the word “maybe” unless it involves a counteroffer. “Yes” is a great answer, and “no” is actually a good answer because you can move to the next prospective investor. However, “maybe” (without a counteroffer) is a terrible answer and only delays the inevitable “no.”

Private Equity
PE Investors are another source for restaurant capital, but it also has shortcomings. Private Equity and other professional investors are pretty good at spotting bad ideas quickly. So, you need to have thick skin and be prepared to be turned down more often than not. On the other hand, if you have a viable concept and a lot of experience or data to back up your claims, you have a better chance of success. The key, however, is to present to Private Equity investors that focus on providing restaurant capital. Like most professional investors, they tend to invest in areas where they have competency. That said, experienced investors will tell you exactly why they are not interested, and you can use the feedback to correct any shortcomings in your opportunity.

Conventional Bank Loan (non-SBA)
Conventional Bank loans are also better suited for very experienced restaurant owners. Banks are also professional investors, and as the saying goes, a “Banker will offer you an umbrella when it isn’t raining only to ask for it back when the rain starts.” To say it another way, Bankers prefer to lend to situations where the borrower takes on most of the risk. For example, if you own a piece of real estate, free and clear, with an appraised value of $100k, your Banker might lend you $50k-$75k with the property as collateral. The Banker will discount the collateral in order to sell it quickly, should you default. To that end, restaurants are harder to finance because most locations are leaseholds. And, new restaurant equipment, like new cars, is worth significantly less after the initial purchase.

SBA Loans
What is an SBA loan? The US Small Business Administration is not a direct lender. Instead, they actually guarantee 50-85% of the Bank’s loan, making it easier for Banks to make loans when there is a “collateral gap” (assets are worth less than the loan amount). The SBA offers multiple guarantee programs for business loans, including 504 (real estate loans), 7a (non-real estate), and Express (fast 7a), and Micro (up to $50k) loans. However, we will focus on the 7a program because it is the most popular SBA program. Under the 7a program, Banks can lend between $50k to $5MM towards a new or existing business. Unfortunately, most Banks have a $300k minimum loan amount for the program due to fixed loan origination and servicing costs.

Preferred SBA Lenders
Not all SBA lenders are the same. “Preferred” SBA Lenders do not have to wait for the SBA to sign off for final approval. This distinction makes it faster and easier to work with Preferred SBA lenders. The designation is difficult to attain and often indicates a successful record for making and servicing SBA loans.

Borrower Guidelines
Although a 7a loan is more accessible than a traditional Bank loan, prospective borrowers must meet specific guidelines and requirements.

• A minimum credit score of 680
• You should have the ability to invest 10% of your own money
• You must have sufficient post-transaction liquidity (the capacity to make the first six (6) loan payments without the benefit of Revenues)
• The SBA prefers direct industry experience, but it is not mandatory for Franchised businesses.
• No Bankruptcies in last ten (10) years
• No active Judgements or Tax Liens

Good for Experienced Owners
If you are an experienced Restaurant chef or owner, the 7a program is an excellent resource for restaurant capital for experienced owners. Your resume and a sound Restaurant Business Plan are all you need. So, it is much easier than trying to convince PE investors or Conventional lenders that the market is ready for a restaurant specializing in artisanal grilled cheese sandwiches.

Good for New Entrepreneurs and New Concepts
As we discussed, it is harder to raise capital for new restaurant concepts, and that’s why SBA restaurant loans are a good alternative. They’re suitable for both new entrepreneurs and new concepts. That said, new entrepreneurs should hire experienced staff (chef, general manager, among others) to make up for any shortcomings.

Ideal for Restaurant Franchises
SBA loans work very well for Restaurant Franchises because the Franchise model offers a proven and formulaic approach to managing the restaurant. The Franchisor has done most of the “heavy lifting” by identifying the product, the serviceable market, and the ideal campaign to reach their customers. The Franchisor also provides ongoing training and support to reinforce its investment in the Franchisee’s success. As a result, lenders are less worried about the viability of the business versus Start-ups and other non-Franchised businesses. The SBA Franchise Directory contains an updated listing of all of the SBA-approved Franchises.

Conclusion
As you can see, there are a variety of options when it comes to acquiring restaurant capital. So, it is imperative to narrow down the pros and cons of each option before committing. We also recommend speaking to proven Restaurant investors for honest feedback about raising capital for your idea, whether you are considering an independent restaurant, a Franchise, or becoming a Franchisor. That said, the SBA stands above the rest as a source for restaurant capital. Please contact us for more information about SBA loans and Franchising.