Guide to Restaurant Funding: Financing and Managing Cash Flow

Every successful restaurant starts with a unique culinary vision. Making that vision a reality takes strategic planning, creative muscle, hard work, and, of course, money.

Whether you plan to open a brand-new restaurant, expand an existing restaurant, or open a new location, you will need restaurant funding to make it happen. If you don't have the cash to pay startup costs out of pocket -- and most aspiring restaurant owners don't -- you'll need a source of capital.

What Is Restaurant Funding?

Restaurant funding consists of money that you receive from an outside source to start, operate, expand, or renovate your restaurant. You may pursue financing from traditional sources like bank loans, Small Business Administration (SBA) loans, and private investors. Alternatively, you may consider alternative funding solutions such as invoice factoring, inventory factoring, or crowdfunding platforms. Understanding and securing the right type of funding is crucial and could make the difference between success and failure for your restaurant.

Managing Restaurant Cash Flow

Once you have obtained sufficient funding, you are responsible for using that influx of cash strategically, as well as any other money flowing into and out of your restaurant. Restaurant cash flow management is different from profit. It includes all outgoing cash transactions, such as paying bills, funding operations, and purchasing new equipment, as well as incoming cash from revenue, funding sources, or the sale of assets. Having sufficient cash on hand to cover expenses and save for future costs helps protect your restaurant during economic fluctuations or business challenges.

Restaurant cash flow falls into three primary categories:

• Financing Activities: Cash flow from debt and equity activities may include restaurant loans, lines of credit, and other restaurant business financing, as well as stock issuance and dividend payments.
• Operations: Operational cash flow in the hospitality industry includes cash coming into the business through sales and cash flowing out for expenses such as payroll, inventory, and vendor invoices.
• Investing: Growing your restaurant business requires cash on hand to invest in new equipment, buy or sell property, or acquire a new location.

Because restaurants are primarily cash-based businesses, restaurant owners need to monitor cash flow daily, weekly, monthly, and beyond. Successful restaurants maintain cash flow through careful budgeting and planning based on cash flow forecasting. A cash flow forecast for a restaurant predicts future cash flow based on past performance. It should indicate projected sales volume, seasonal sales trends, and cash outflows like loan payments, utility payments, inventory costs, and payroll.

Types of Restaurant Funding

Restaurant funding solutions provide working capital to fund special projects such as startup costs, expansions, or remodeling updates while maintaining effective cash flow management. You can pursue funding for these projects in several ways:

Restaurant Loans

Restaurant business loans from a bank or credit union provide upfront capital to start a new restaurant or purchase an existing one. You can use the funds for location purchases, equipment upgrades, renovation and building costs, and other startup or operational expenses.

Many lending companies have loan programs tailored to small businesses and can help you choose a restaurant funding solution tailored to your needs.

Flexible Funding Solutions for Restaurants

As an alternative to traditional loans and lines of credit, some owners choose restaurant funding solutions like invoice factoring or inventory factoring to access cash tied up in accounts receivable. These restaurant funding solutions help fill cash flow gaps between invoicing and payment, and they can be an effective way to expand quickly or support increased demand during growth periods.

Invoice Factoring for Restaurants

Invoice factoring for restaurant cash flow gives you quick access to cash owed to you in the form of unpaid invoices. You sell your unpaid invoices to a factoring company, and they provide you with cash for the invoices minus the factoring fee. Then, they are responsible for collecting payments from customers. With invoice factoring, you don't have to worry about cash flow challenges if an invoice goes unpaid.

Inventory Factoring for Restaurants

Inventory factoring is similar to invoice factoring, except that it uses inventory instead of invoices as collateral. Inventory factoring functions like a business line of credit in that you receive cash against the value of your inventory and then pay it back as you make sales. Because inventory factoring tends to be more expensive, it is usually best to use this option only if invoice factoring doesn't cover your cash flow needs.

Restaurant Line of Credit

A line of credit differs from a restaurant loan in that you receive approval for funding up to a certain amount, but you don't have to use it all. For example, if you use $25,000 of a $75,000 line of credit, your payments would be based only on the $25,000 you spent, and you still have $50,000 available.

SBA Loans

The Small Business Administration's 7(a) loan program provides capital for small businesses through government-backed private loans. There are several types of SBA 7(a) loans, including small loans (less than $500,000), standard loans ($500,000 to $5 million), and others designed for specific circumstances. Terms and conditions vary by type of loan.

SBA loans can provide the capital you need for startup costs, equipment purchases, and expansion or renovation costs.

Private Investors

If you can demonstrate a viable business model and restaurant cash flow strategy, you may be able to get funding from private investors. Investors typically look for success indicators like a strong leadership team, substantial market opportunity (your restaurant fills a gap in the market), realistic financial projections, a marketing strategy, and a unique or innovative offering.

Crowdfunding

Crowdfunding is the new kid on the block when it comes to restaurant business financing, but it can be highly effective in the right circumstances. With this financing option, you can use a crowdfunding platform to ask the public for contributions in exchange for a benefit, such as a free meal.

Crowdfunding usually works best if you already have a group of followers who enjoy what you offer and can help you spread the word. For example, if you have an active Instagram account where you showcase your cooking ideas and recipes, you could use that platform to launch your fundraising campaign.

How to Get Financing for a Restaurant

Any of the restaurant financing options above will require you to demonstrate financial viability to qualify for the loan. But how do you prove you can run a restaurant successfully if you are just starting out? Here are 5 steps you can take to increase your chances of getting financing for your restaurant:

• Create a Strong Business Plan: Lending institutions and investors want to know that you have a viable plan for making your restaurant a success. A thorough, well-supported business plan demonstrates your knowledge of how to run a business and differentiate your services. Your business plan should include detailed financial projections, market analysis, and a clear concept description.
• Make Industry Connections: Networking with others in the restaurant business can help you connect with opportunities you wouldn't otherwise have access to. Building relationships with restaurant professionals, bankers, and local real estate agents puts you in the best position to take advantage of funding opportunities as they arise.
• Choose the Right Type of Funding: Consider the available restaurant funding options and decide which one makes sense for your circumstances. Eligibility requirements and loan terms differ based on the type of solution or loan, so take time to explore each option in depth. Evaluate interest rates, payment requirements, and associated fees for several lenders before deciding.
• Gather Financial Documentation: Before issuing a loan or providing startup capital, banks and investors will want to see documentation of your financial history. This may include personal financial statements, recent tax returns, credit reports, and any existing business financial records.
• Submit Your Application: Fill out and submit an application for each type of loan you are considering, including any required financial documentation.

Why Is Restaurant Funding Important?

Even the most experienced chefs cannot build a sustainable business on culinary talent alone. Without restaurant funding, you won't be able to secure a location, purchase equipment and inventory, hire staff, or absorb slow cash flow in the early days of your restaurant. Lack of adequate funding is a leading cause of restaurant failure, and many aspiring restaurateurs end up closing their doors because they don't have enough financial buffer to navigate bumps in the road.

Sufficient funding smooths out those bumps so you can focus on establishing stable operations, purchasing quality equipment and ingredients, and marketing your new restaurant effectively. With additional cash flow from a restaurant loan or other funding source, you can create exceptional culinary experiences that position you for long-term success.

Get the Funding Your Restaurant Needs

Securing restaurant funding may seem daunting, but with careful planning and preparation, you can find the right financial partner to make your vision a reality. Whether you are opening your first restaurant or your third location (or more!), a helping hand can make all the difference.

At Paychex, we understand the challenges of securing funding in the restaurant industry, and we're here to help. With invoice factoring services, you can gain access to the working capital you need to take your next step. Once your restaurant is open and operational, our HR and Payroll services provide workforce management support so you can focus your attention where it's needed most.