It can be hard to find a traditional small-business loan to open a new eatery. Restaurants are notorious for their high failure rates and banks are more risk-averse since the 2008 financial crisis. Some won’t lend to restaurants at all, according to a 2014 Harvard Business School working paper.
Your restaurant financing options include loans backed by the U.S. Small Business Administration, online small-business loans, private investments and crowdfunding. While weighing those options, there are a few things you can do to increase your chances of getting approved. The following tips come from a panel at the Golden Gate Restaurant Association’s industry conference on July 26, 2015.
1. Ask friends and family first.
Pitching your business to lenders and investors takes practice, so start with your inner circle and expand out. Fielding tough questions from those closest to you will help you learn your business, and eventually approach lenders and investors with confidence.
[LEARN MORE: Compare small-business loans]
Mike Harden, co-founder of the San Francisco-based venture capital firm Artis Ventures, said he can often tell from an initial email if it’s worth meeting with an entrepreneur. He said he looks for owners who know their business inside and out, are honest about their concerns and have “a certain authenticity.”
“You don’t get that way on your first pitch,” he said.
2. Get feedback on your business plan.
Get feedback on your business plan from your attorney, accountant and other restaurateurs, said Charles Bililies, owner of Souvla, a casual Greek eatery in San Francisco’s Hayes Valley neighborhood. Bililies also used other restaurants’ business plans as guidance for Souvla’s.
“You may be the best cook in the world,” Bililies said, “but if you cannot operate your restaurant as a business, that means you just throw great dinner parties.”
3. Have your paperwork ready.
It can take months for some SBA loans to get funded, said Marlow Schindler, lender relations specialist at the San Francisco SBA district office. But, she added, if you have the correct paperwork ready when you apply, you can get funded in a few weeks.
To apply for an SBA-guaranteed loan you’ll need personal and business income tax returns and financial statements, a loan application history and legal documents such as your business license and lease.
4. Be critical of crowdfunding.
Rewards-based crowdfunding can be a good option for businesses that have a large email list and social media following. But it can also be expensive when you factor in the cost of T-shirts or other prizes for backers, as well as the 5% that popular platforms Kickstarter, Indiegogo and GoFundMe take from the total amount you raise.
Derek Dukes considered financing his San Francisco restaurant, Lazy Bear, with a crowdfunding campaign. In the end, he said, he decided that the “expected yield” wasn’t worth the work it would require. But he’s not ruling it out altogether — he said he might crowdfund a future Lazy Bear project, such as a cookbook.
5. Don’t make a nondisclosure agreement.
Entrepreneurs often want to protect their ideas with nondisclosure agreements before their restaurants open — even if they’re just starting a hamburger joint, said Roberta Economidis, an attorney specializing in the hospitality industry at Georgopoulos & Economidis law firm in San Francisco.
Rather than wasting energy hiding your plans, you should be sharing your ideas with people who can help you improve and execute them, Harden said.
“If someone comes to me with a nondisclosure agreement, it’s a great excuse not to meet,” Harden said. “I know that they’re not ready to do the hard work.”
To get more information about funding options and compare them for your small business, visit NerdWallet’s best business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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