Running a restaurant is hard work. Not only do you have to develop a viable business plan and ensure product-market fit, you also have to get a massive amount of operations up and running. That could include anything from renting a space for your restaurant, applying for business and liquor licenses, purchasing or upgrading equipment, setting up supply orders, overseeing branding and design work, hiring and paying your staff, managing benefits programs, and more. Operating a restaurant isn’t a venture for the faint of heart — you have to have a detailed vision for your business, and be passionate about the work that you do.
However, before all of that even begins, turning your dream into a reality often relies on one not-so-little thing: money. Getting capital and funding after presenting a thorough business plan to investors is a necessary first step to getting the capital you need to run your restaurant. Luckily, there are plenty of resources out there to help you get the funds you need to get started.
The real cost of operating a restaurant
Operating a restaurant isn’t cheap. According to a survey by RestaurantOwner.com, the average cost just to launch a restaurant is $275,000, but can go up to $425,000 if you factor in buying the building. This amount can vary greatly depending on your location. Piedmont Avenue Consulting, a San Francisco Bay Area-based consulting firm, lists the average cost to launch a restaurant in the Bay Area as $500,000 to $650,000.
Direct labor costs: $546,124
Direct operating costs: $32,141
Repair and maintenance costs: $16,591
General administrative expenses: $227,678
Occupancy costs: $116,009
As you start to review the numbers it takes to run your restaurant, you may decide it’s time to apply for a loan or a grant. Fortunately, there are plenty of funding options that exist for restaurateurs to get the cash they need up front, so they can grow their business sooner.
What restaurant funding can help with
When you receive capital for your business plan, there are a lot of ways you can spend that money. Here are some of the top reasons why restaurant entrepreneurs pursue funding
Hiring more staff
Acquiring more inventory
Updating old equipment or furniture
Hiring consultants to update your branding, marketing operations, training, or something else
Opening additional locations
Remodeling your current location
Launching a pop-up restaurant
Developing and launching new product lines, like packaged goods or merchandise
Restaurant capital options
Once you know what you need the money for, the next step is to figure out where to get it from — and there’s no one-size-fits-all option for restaurant capital. Depending on your business plan, one type of funding might work better than another. Here are some of the most popular ways to get restaurant financing — and how they differ from each other.
SBA stands for the Small Business Administration of America, and it’s the arm of government that helps small businesses with small business lending and more. They don’t lend out money directly to entrepreneurs — instead, they partner with private lenders backing up a portion of the capital with their own guarantee, reducing risk for lenders.
They offer a few different types of loans, including: 7(a) Loans, which cap interest rates and limit fees for borrowers; 504 Loans, which offer long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery or other assets; and Microloans, which offer up to $50,000 to help businesses start or expand.
Pros of SBA loans: SBA loans generally have low rates, fees, and down payment requirements, and some loans come with the offer of business counseling and education programs.
Cons of SBA loans: SBA loans have specific eligibility requirements. The borrower must have invested equity (time or money), cannot get funds from any other lender, and must be a for-profit business in the US. There’s also more paperwork involved than other funding options.
Informal loans are capital loans from family members or friends. Even though these are “informal,” having a signed contract that makes the terms of the loan clear to both parties is critical — and shouldn’t be skipped.
Pros of informal loans: Both parties have complete control over setting the terms of the loan, offering flexible repayment plans and potentially no fees.
Cons of informal loans: With informal loans, a relationship is on the line. If you don’t repay the loan on time or another conflict comes up between both parties, the relationship could go south — and incur an emotional cost.
Often harder to come by, grants are essentially loans that don’t need to be repaid. The CARES Act is one of the largest scale grant programs that restaurants and other small businesses could qualify for. Your local restaurant association may also have grants available as well.
Similarly, there are a handful of restaurant incubator programs, like La Cocina, which often give new restaurateurs space and a grant to get started. If you’re a woman-, BIPOC-, or immigrant-owned business, there are targeted incubator programs you might qualify for that are designed to help level the playing field.
Pros of grants: Free money!
Cons of grants: Depending on the grant program, there may be some stipulations about how the money can be spent.
Bank loans are similar to SBA loans but aren’t overseen by the SBA. Banks loan businesses money according to terms set by the bank, and often don’t require as much paperwork as an SBA loan.
Pros of bank loans: Interest rates are lower than credit card rates, and borrowers may be able to customize terms according to their specific needs.
Cons of bank loans: Borrowers need to be on the lookout for predatory lending, which is lending that doesn’t have the borrower’s best interests in mind. Read through all paperwork and consider hiring an independent financial consultant to ensure you’re not getting into a contract that will have you owing more than you’re able to pay.
Merchant cash advances
A merchant cash advance, or MCA, is when a borrower receives an upfront sum of cash in exchange for a portion of future sales. This amount, plus fees, is paid back daily or weekly — either through a portion of debit or credit card sales, or through an ACH withdrawal sent to the lender.
Pros of MCAs: Borrowers of MCAs can get access to cash quickly, oftentimes in less than a week, and don’t need an outstanding credit history to qualify. MCAs also tend to have fewer restrictions on what the money can be used for.
Cons of MCAs: Rates and fees can be more expensive than alternative loans, so do the math before committing. MCAs are also tied to your business’s sales, and your fees could go up if sales don’t grow as planned.
Crowdfunding is a way for restaurateurs to raise money from their communities, online or through word of mouth. There are a variety of crowdfunding platforms to choose from, but popular ones include Kickstarter, Indiegogo, and Patreon. In exchange for rewards or benefits set by the restaurateur — such as branded merchandise, thank-you notes, or access to early ordering — individuals pledge money to the business idea.
Pros of crowdfunding: Crowdfunding platform fees are generally low, and there are often a few funding terms to choose from. Crowdfunding is also a great way to rally your supporters around a cause, building relationships with customers and creating a community that wants to see you succeed.
Cons of crowdfunding: Some crowdfunding terms require crowdfunders to reach a minimum or a target goal in order to receive all of their funds. A successful crowdfunding campaign also requires a strong marketing campaign to help get the word out — and donations rolling in.
Tenant improvement allowance
Not technically a loan, a tenant improvement allowance is money given from a landlord to a tenant to help pay for improvements to the space, usually calculated by the square footage of the restaurant. This usually covers hard costs like updating electric wiring and plumbing, and installing new doors and carpets.
Pros of a tenant improvement allowance: You get back some of the money you invest in improving a space, lowering your startup costs.
Cons of a tenant improvement allowance: It won’t cover all of the updates you make to a space, since landlords are typically only interested in improvements that increase the value of their property. Plus, the details can get complicated so you’ll want to work with a lawyer to get all of the terms down in writing in a signed legal agreement.
Tips for funding your restaurant business plan
At the end of the day, money is just one (important!) factor in your business’s success. Even with the right funding, opening and operating a restaurant is still a bold and potentially risky venture. According to CNBC, roughly 60% of new restaurants fail within the first year, and about 80% close within 5 years.
To set your new venture up for success, make sure to sharpen your restaurant business plan and conduct accurate sales forecasting. Read up on the areas where new restaurants typically overspend, and consider curating a community of professional consultants and other experienced restaurateurs to go to when you need advice or a sounding board.
Not sure where to get started? DoorDash’s Main Street Strong program was launched to help restaurant owners and dreamers access the resources they need to be successful, and includes a learning curriculum available to all DoorDash partners. Since March 2020, the program has distributed $11M in small business grants to help restaurants recover from COVID-19 related challenges. Today, we’re continuing to help restaurant owners find support and community with ongoing efforts. Learn more about DoorDash resources to help turn your restaurant dream into a reality.
Disclaimer: The above is for information purposes only; DoorDash cannot provide advice to merchants on financing options, and the above is not meant to be an endorsement of any particular third-party resources. We recommend that merchants consult with their own financial advisors in making any financing decisions.