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Business Franchises

A Plain Language Guide to Restaurant Financing on the Smaller Scale

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Without any food service experience or funds of their own to contribute, first-time entrepreneurs will likely face some hurdles in their search for financing. Working in their favor, though, are a number of options meant to help open doors for operators of all kinds, from small-scale franchisees and independents to start ups and growing chains.

Some investors are more amenable than others when it comes to new or early stage foodservice operations. Limited partners, "angel investors" and the U.S. Small Business Administration (SBA) are among the most receptive resources, while traditional banks, private equity firms and venture capital sources can be less within reach.

In between are credit cards, home-equity loans or lines of credit, and loans or investments from friends and family. For many, a patchwork of funding sources is the most realistic approach.

Take it to the bank

Banks, often the first stop for prospective business owners, are a good starting point for potential restaurateurs as well. Although they rarely grant direct loans to high-risk ventures such as restaurants, banks can direct clients to a number of resources.

For candidates who don't meet a bank's credit criteria for personal or commercial loans, the Small Business Administration (SBA) might be an option. Not only does this government agency provide lenders safeguards by offering a partial guarantee on loans, it also can help establish longer loan terms with smaller payments.

To be eligible, restaurant companies must have average three-year annual sales at or below $6 million. Available amounts range from $25,000 to $2 million, says Director of Loan Programs Jim Hammersley, with interest rates that typically run two points over prime but may be higher or lower depending on individual circumstances.

Aside from SBA-backed loans, entrepreneurs often tap banks for home-equity loans or lines of credit, which can be simple to obtain and faster than the typical SBA waiting period of two to three months. It's often the method of choice for those just getting started in foodservice. Interest payments on such loans typically are tax-deductible as well.

On the negative side, however, is a significant risk: If the venture is a bust, the borrower could lose not only their business, but their home as well.

Two heads are better than one

Though many operators turn first to friends and family as investors, industry experience paired with a first-rate idea can create a deeper pool of potential partners. Such was the case for John Parlet, president and CEO of John's Incredible Pizza Co., a six-unit chain based in Lake Forest, Calif.

After opening his first three stores on a combination of SBA loans, help from friends and his own contributions, Parlet met the owner of an independent grocery store chain when looking at a piece of property. Based on the restaurant's existing units and Parlet's formal presentation of his business plan, the grocer came on board as a silent partner, providing full financing in exchange for an equity position and substantial performance-based returns.

Connecting with willing investors need not be left to chance. More restaurateurs are capitalizing their dreams of first-time ventures and multi-unit growth with help from "angel investors." Working in networks or on their own, these high-net-worth individuals fill the gap between self-funding and higher levels of venture capital by providing their own funds to new or growing enterprises.

Again, when seeking financing for your venture, the best bet is a patchwork of different options. Whatever options get you closer to your goal, should be explored, but expecting one solution to be the silver bullet might be a little too much. Sometimes combining low interest options with higher interest options can provide a middle ground and give you the start-up capital you need to get off the ground.

This article was originally published on Restaurants & Institutions and has since been updated and edited for better clarity.

Restaurants and Institutions is the leading source of vital information for the entire food service industry, covering chains, independent restaurants, hotels and institutions.

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