6 Ways to Fund Your Restaurant Expansion

By Eric Goldschein | 4 min read

Running a restaurant is no easy feat. It’s difficult for restaurants to make it out of their first year — one study reports a 23% failure rate after 12 months, and that number may be even higher for restaurants in high-pressure markets like New York City.

Once you’ve established yourself, however, you might be inclined to keep growing, building out a bigger kitchen or opening a new location altogether. If you’ve gotten to the point where you’re not just succeeding, but looking to expand your restaurant, you’re clearly on the right track.

In order to expand your restaurant, you may need to secure funding. Not having the cash in hand shouldn’t necessarily stop you from expansion. If you can find a responsible source of funding that makes sense for you, it can be a worthy investment.

There are a number of ways you to finance a restaurant expansion. We’ve reviewed six great options for you below.

Equipment financing

Few businesses rely as heavily on major equipment as restaurants. From industrial ovens and refrigerators to stovetops that can handle hundreds of orders a night, your restaurant equipment is the lifeblood of your business.

If you’re looking to expand your restaurant, you may need to invest in new equipment. If funds are tight but you don’t want to settle for anything less than the best, equipment financing may be your best option.

Before you sign on the dotted line, there are a few basics of equipment financing to know. The process involves taking out a loan that covers the exact cost of whatever equipment you need. The equipment itself acts as collateral for the loan. So if you are unable to make payments for any reason, the lender simply recoups their loss by taking by the equipment. Once you pay off the loan, the equipment is yours.

There are a number of benefits to going with equipment financing. You typically have quick access to the money you need. There are usually just a few days from application to funding, and many businesses will qualify for it regardless of credit history. Interest rates vary from about 8-30%, depending on your situation and the equipment in question.

Term loans

Term loans are what most people imagine when they think of loans. You receive a lump sum of money and pay it back, with interest, over a set amount of time.

Lenders typically offer both short-term and long-term loans. However, restaurateurs will want to explore long-term loans if they qualify. Long-term loans are less expensive, with lower interest rates, and can have terms lasting 25 years. Most businesses interested in long-term expansion and development look to long-term loans. This includes buying real estate or opening a new location, for example.

Restaurants that want a long-term loan will have to demonstrate a strong credit history and profitability. Otherwise, a short-term loan with a quicker repayment term and a higher interest rate can be a good option for newer business or those with weak credit.

SBA loans

The Small Business Administration is well-known for its loan program, in which the federal agency partially guarantees loans disbursed by trusted lenders. This guarantee encourages the lender to offer the loan with very low rates — to highly qualified borrowers only.

Restaurant owners with high credit scores and long-established businesses can qualify for an SBA loan. A heads-up, though: the application process is a long and arduous one. Expect the funding decision to take months, as opposed to possibly days for short-term loans and equipment financing.

If you have your eyes set on a major expansion, SBA loans have low rates. They also include long repayment terms and come with a wealth of SBA-backed resources, such as counseling and training.

The SBA has various loan programs, though its popular 7(a) loan program and CDC/504 loan programs offer potentially millions of dollars in funding over many years. This makes these two options your best bets for restaurant expansion.

Lines of credit

A business line of credit is similar to a credit card. A lender offers you a large pool of money from which you can make any number of draws, for a variety of amounts. You then pay each drawback on its own schedule.

Though a line of credit typically has higher interest rates than a term loan, business owners prize this option for its flexibility. You can keep it in your back pocket and use it as needs arise. If you’re in the middle of restaurant expansion and sudden unexpected costs crop up, a line of credit becomes incredibly valuable. It allows you to plug up the holes without missing a step.

6 Ways to Fund Your Restaurant Expansion

Venture capitalists

Maybe you want to go in a completely different direction from debt financing. You could also explore equity financing, or attracting the interest and investment of venture capitalists with available funds.

Venture capitalists are different from angel investors in that VCs typically invest in well-established businesses. If your restaurant has been around for a while and you’re looking to expand, a venture capitalist or VC group will be the ones to woo.

VCs can really be anyone with money to invest. They can be from your inner circle — family, friends, peers — or outside investors. You may want to attend or even throw your own networking events in order to meet and eventually pitch potential investors in your project.

Keep in mind: equity financing means giving up partial control of your restaurant to your investors. If you want to maintain autonomy and executive oversight, you’ll have to either relegate your investors to small minority status or buy them back out eventually.

Crowdfunding

Crowdfunding isn’t just for crazy side projects. The crowdfunding industry is expected to grow to over $300 billion worldwide by 2025. If you can make a compelling online pitch for your restaurant expansion, there’s no reason why you can’t crowdfund the concept. At that point, how much money you raise is up to you.

Not all crowdfunding is simply donation-based, equity-based, or debt-based. Each crowdfunding platform (and there are many) has a different set of rules and regulations. Decide which one works best for you before crafting your pitch and asking for investment.

The decision to expand your restaurant business is a long-term move with immense implications for your bottom line. Before you decide to take on any sort of financing, make sure you crunch the numbers and prepare to explain how an investment in your restaurant’s future is a good one.

At the end of the day, you have to believe that funding your restaurant expansion is a good idea before anyone else will.

 

Now that you know all about funding your restaurant expansion, request a live tour to see how Gather can help you grow!

Eric Goldschein
Eric Goldschein
Guest Contributor

Eric Goldschein is a staff writer at Fundera (fundera.com), a marketplace for small business financial solutions. He covers entrepreneurship, small business trends, finance, and marketing.

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