The information discussed in this article is provided for informational purposes only and should not be relied upon as financial or legal advice. For financial or legal advice, you should consult a professional financial advisor or your attorney. The statements made by the merchants in this article are those of the speaker, and do not necessarily reflect the opinions of Toast or constitute any endorsement by Toast.
Nowadays, it seems like everyone wants to open a restaurant. It’s fun to daydream about what you’d put on your menu, how you’d decorate the space, what kind of boss you’d be, and how you’d assemble your dream team.
But one big question that people love to ignore when daydreaming is, “How will I fund my restaurant?”
When it comes to funding a restaurant, there are many, many different ways to go about procuring capital. In an episode of The Garnish, we spoke with Joanne Chang — whose bakery, Flour, has expanded to eight locations across Boston — about how she gained funding for her now very successful restaurants.
We also spoke with Emiliana Puyana, a Program Manager at La Cocina, a culinary business incubator that helps women and immigrants start businesses through mentorship, training, connections to funding, and subsidized use of a commercial kitchen. She told us about alternative paths to funding that are available to just about anyone.
Let’s dive into the basics about funding a restaurant, and then we’ll learn from the experiences of Joanne Chang and Emiliana Puyana.
Joanne Chang and Emiliana Puyana on Funding a Restaurant
Restaurant Business Loans
Here are six of the most common sources of restaurant funding.
1. Bank loans
Bank loans are typically the first thing someone thinks of when looking to get a business loan. The terms vary greatly depending on the industry and type of business – and the bank itself.
Bank loans generally have flexible payback periods and help build business credit. And, if you have an existing business relationship with a bank, it can make the process even easier. However, bank loans also typically require strong credit, high collateral, and longer wait times (usually one to three months).
Here are some typical eligibility requirements as defined by Nav:
“They will want to look at bank statements and tax returns. They may also require financial statements, such as an up-to-date profit and loss statement or a balance sheet. They may also require a business plan to get a sense of your business’s financial health and plans for growth.
Most banks prefer to see annual revenues of $1 million or more, as well as a low personal debt-to-credit ratio. In general, you’ll likely need personal credit scores in the 700s, but some banks will approve a borrower with a personal score of 680+ provided other business metrics demonstrate a healthy business and the ability to service debt… Many banks may also have a minimum amount they want you to apply for, and may not fund loans under say $250,000, preferring to deal with loan amounts of $500,000 or $1 million or more.”
Crowdfunding is a funding option where new business owners pitch their business idea or product idea to the public. Supporters can then financially back the idea, either for a reward (like an invite to the grand opening, a free meal, or merch once the restaurant has launched) or just because they believe in it.
Popular crowdfunding websites include GoFundMe, Kickstarter, and Patreon. Some websites, like Kickstarter, have specific sections dedicated to restaurants and are a great place to start if this is an option you’d like to pursue.
This option has a lot of benefits, such as the ability to reach a large base easily, and streamline the fundraising process on a single platform. And it’s growing in popularity.
A recent report from Crowdfund Capital Advisors says that “by 2024, we believe over $170M cumulatively will have been invested into restaurants raising money online.” And, even more impressively, the success rate is amazing. “Compared to Venture Capital where less than 6.5% of firms successfully raise funds, the success rate for restaurants in Reg CF hovers around an impressive 76.58%,” the report explains.
3. Alternative lenders
Alternative loans are different than traditional brick and mortar bank loans, and can come from bank and non-bank lenders. Alternative loans can come in many different forms and tend to be more flexible, available, and accessible, especially for owners who might not have strong established credit or collateral available. They generally have favorable repayment terms and quick availability.
Microloans are a type of alternative loan. They are smaller loans, often from non-profit organizations, typically with the goal of providing capital to underserved communities. Emiliana Puyana explains more about microloans in more detail further down.
Another option as an alternative loan is a Toast Capital Loan. Toast Capital Loans offer eligible Toast customers fast, simple funding to help grow your business. With repayment that flexes with sales, no compounding interest, and no personal guarantees, Toast Capital Loans provide restaurants with funding from $5K to $250K. Additionally, Toast Capital Loans have one fixed fee - with no compounding interest and no personal guarantees. Better yet: once approved, you can receive your funds as soon as the next business day.*
*Toast Capital Loans are issued by WebBank, Member FDIC. Loans are subject to credit approval and may not be available in certain jurisdictions. WebBank reserves the right to change or discontinue this program without notice. Toast Capital Loans have either a target maturity of 90 days and a maximum term of 150 days or a target maturity of 270 days and a maximum term of 330 days, based on eligibility.
4. SBA loans
Small Business Administration (SBA) loans are loans that are facilitated and guaranteed by the U.S. Small Business Administration. The SBA partners with small lenders (partnering lenders, community development organizations, and micro-lending institutions) to make it easier for small businesses to procure a loan from one of the SBA’s loan programs.
SBA loans are geared towards small businesses, so they generally have favorable repayment terms and little required collateral. On the other hand, they tend to be smaller loan amounts and have a longer approval process than other options.
If you have a longer timeline, flexibility in your loan amount, and fit the eligibility criteria, an SBA loan is a great option for many restaurant owners. Bob Coleman, a small business financing expert, cites it as one of the best ways to get a loan. “The rates are amazing.” he explained, “For a patient entrepreneur who has her ducks in a row and is willing to go through the process, it’s a lot cheaper capital.”
Here are the eligibility terms defined by the SBA:
“In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet size standards, be able to repay, and have a sound business purpose. Even those with bad credit may qualify for startup funding."
5. Equipment financing
Equipment financing is a great option to get capital for restaurant equipment-related projects. Equipment financing is a way for restaurant owners to access capital to purchase equipment, an essential part of any restaurant business.
NerdWallet describes it like this: “If you're looking to purchase large items like an oven or dishwasher, you can turn to restaurant equipment financing. This type of financing can be easier to qualify for than a traditional small-business loan because the equipment serves as collateral.”
But be careful: this can make a lot of sense for bigger items (like stoves, refrigerators, or dishwashers) but they don’t typically make sense for smaller items (like microwaves or smaller appliances).
6. Merchant cash advance
With a merchant cash advance, a provider pays the restaurant an upfront lump sum to purchase a percentage of the restaurant’s future sales. From there, the restaurant owner pays the cash advance provider the agreed-upon percentage of sales (typically from credit card sales), until the provider has received the full amount purchased, plus a fixed cost.
This option is very convenient: it provides fast access to cash, no collateral, and the provider usually automatically deducts payments, so no need to stay on top of a monthly bill.
According to Funding Circle, “MCAs are accessible by businesses of all shapes and sizes in a variety of industries. However, they can be expensive for companies with very poor credit scores and weak financials.”
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What to Prepare when Seeking Restaurant Funding
Restaurant business plan
A strong business plan is essential to securing any type of restaurant funding. A restaurant business plan provides you with the opportunity to organize your vision and ensure that nothing is overlooked when opening a new restaurant, and how to best explain that vision to a potential investor. The business plan provides them with a complete description of your strategy.
Learn more about building a successful business plan here.
It’s a smart idea to start digging up some of the financial statements you’ll need during your application process early. If you are applying for a loan, lenders will potentially ask for bank statements, tax records, lease agreements, and financial statements, so make sure you have them readily available.
Information about you and your business
Along with financial statements and information about your business, make sure to gather any personal information that would be relevant. This includes information about your credit score, personal loan history, and any collateral you might be able to use to secure a loan.
Restaurant Business Plan Template
No matter where you’re at in your restaurant ownership journey, a business plan will be your north star. Organize your vision and ensure that nothing is overlooked with this free template.
How Joanne Chang Built Flour
Joanne Chang funded the first Flour bakery with help from her family and her savings. “I was eager to open my own bakery. I was starting to look at bank loans and trying to find investment, and I'd written a business plan. My parents said, ‘Why don't you take your business plan and share it with your uncles and see if they are interested in investing?’”
They wanted to help her achieve her goal, so they contributed some money, as did her parents. Chang was also able to bring some money to the table. “I'd worked as a management consultant directly out of college, and so I liquidated all of the mutual funds that I bought when I first graduated and invested money as well. So we really scraped together a little bit of money here and there from some relatives and my parents and myself, and opened up on a shoestring budget.”
At first, Chang had no interest in growth. But Chang felt the push to expand when she realized her staff didn’t have much room to grow professionally. She wanted to keep them in the company and offer more management roles for existing staff to grow into — including a pastry chef role — so she started looking into opening the second location. “We just had so many people that wanted to stay, and I wanted to keep them within the company. So opening a second location seemed to be the best way. We were really lucky.”
After six years of running a very successful bakery, Chang had the cash flow and credibility to take out a loan. “We ended up taking out a bank loan, and then also investing some funds from cash flow from the first location,” said Chang. “At that point it was six and a half years in. So we had decent cash flow and we just decided to divert that cash into helping pay for the second one. And then we paid for about half with the bank loan as well.”
Chang has learned a few key lessons over the years, especially about finances and expansion.
She says financial and business learning is crucial for anyone embarking on a new venture in the restaurant industry. “I think anybody who's opening a restaurant should take an accounting course. I really do,” she said. She elaborated:
“We try to teach our managers the basics of the P & L, and the basics of COGS, and labor costs and cash flow, and I can tell that some sort of get it, and I can tell others are just kind of reading the numbers that we've told them to read. And I really think if you're going to operate a business, you need to understand, just as well as you understand what happens when you mix sugar, flour, water and butter together to make a pâte brisée, you need to understand what happens when you have expenses and bills and payroll and taxes and credit card payments and all of the different ways in which people get paid and have to pay out to vendors.”
She said while many people do successfully outsource the financial side of running a restaurant, you have more control if you understand how everything works. “I just think for the health of your business, to know and understand fully what's happening to every dollar coming in and every dollar going out, it's really invaluable,” she said.
Chang also knows that her team is her greatest asset. “The amount of work that it takes to both find great staff and then keep great staff, the amount of work that it takes to train everybody so they're ready to put forth the vision you've created — it’s an extremely HR-dependent business. I think a lot of people that go into opening restaurants are all about the food, which I am as well, but you learn very quickly that it's all about the people.”
How La Cocina SF Helps Fund Hundreds of Restaurant Dreams
In San Francisco, food business incubator La Cocina connects women and immigrants to resources that might be out of reach otherwise, including hands-on mentorship, subsidized access to a commercial kitchen, technical assistance and training, and connection to micro-lenders and other forms of funding.
Emiliana Puyana is a Program Manager there, and she helps food entrepreneurs who don’t have access to substantial money from their personal or professional network navigate the intricacies of starting their own business. Most of the businesses that come up through La Cocina start as small businesses, like farmers market stands or catering companies, and some eventually turn into restaurants.
Puyana explained to The Garnish how this process usually goes.
First, La Cocina supports the entrepreneurs in growing their concept and creating several revenue streams. “Once we've achieved that, then we begin to search for those exit opportunities, that ultimate restaurant location. That process, we hope, will take no more than three years, but often it can take between three and five. And during that time frame, our entrepreneurs have really built a robust catering business or maybe they’re regular participants at farmer's markets around the city. And so they basically build these diversified revenue streams that allow for them to present to a micro-lender as a more sure thing. Even though in the restaurant business, that's an incredibly hard thing – I mean, it's just a risky business.”
Puyana said that the people who come to La Cocina for support typically have very little luck with bank loans. “Traditional lending institutions aren't going to take a second look at a small business owner who is entering into the restaurant industry and having a business that has $300,000 in sales a year. So what we're left with is a host of different alternatives to consider.” Puyana explained that La Cocina is able to connect entrepreneurs to these alternatives, such as:
Kiva, a crowdsourcing microlender: “The idea there is that as an entrepreneur, you don't need a credit history. You just need people from your own community to vouch for you... I get 20 of my closest friends or family members to lend me $20 or $25 each, which basically gives Kiva the reassurance that if people within my own circle are willing to lend to me, they basically speak to my credibility as a buyer. And then I get to go live on their site and I get to crowdsource the rest of the money that I'm trying to borrow, and then I get this money, whether it's $1,500 or $10,000, and it's interest-free and I get a predetermined amount of time to pay that money back.
Adelante: "[A] fund in conjunction with The Mission Economic Development Agency... You can get up to $100,000 loans on them, interest rates are, depending on your credit history, between 2 to 5% — essentially higher than a traditional lending institution, but it gives you access to $100,000 that you otherwise wouldn't have access to. They're not predatory lenders. They don't require such an extensive credit history and so on and so forth.” Puyana also mentioned Opportunity Fund, a similar organization.
Puyana noted that for many reasons it can be easy for some people to access capital, but not for others. “It's so incredibly frustrating. When we look at most cities around the US and why they become tourist destinations and why people love them, it's more often than not because of the folks that make up the fabric of that city, the restaurants that adorn every street corner. And I think so often people have no idea how truly difficult it is, as an immigrant, as a person of color, to even make it, even into a little corner restaurant that appears to not be that pretty — that is a feat unto itself. It's a system that is rigged. It's a system in which it’s so incredibly difficult to compete because the playing field is, is never equal, never even, and every time that you think you see the goalposts, then it gets shifted further away from them.”
The process of cobbling together money from many different sources is exhausting — but it’s worth it for these entrepreneurs. Puyana also noted that she’s constantly impressed with the money-savviness and business smarts of the entrepreneurs at La Cocina.
“I mean, I don't even know why I'm surprised anymore — the entrepreneurs that I have the pleasure of working with at La Cocina are some of the best folks with money that I've ever been around,” said Puyana. “You have people like Isabel Pazos, who's a single breadwinner for her family, has really minimal English skills, but has been operating a business in San Francisco now for nine years. After being in business for seven years as a caterer and at farmer's market stands, it comes time to open her restaurant. And she's like, ‘Well, I've saved $70,000. I just have $70,000 sitting in the bank from running this business wisely.'”