Starting and growing a restaurant can be a cash intensive proposition. Buying or renting space, kitchen equipment, and furniture is just the beginning. Add on utilities, salaries and inventory, and it’s no surprise that so many restaurateurs struggle with making ends meet.
There are, however, many sources of capital available to the savvy business owner, and perhaps none is so important to the health of a growing restaurant than debt. Loans, leases, credit cards, mortgages, and personal notes of all kinds can get a new restaurant off the ground, or help a growing restaurant thrive.
No Money Down
Jimmy Kavopovis, 42, is the proud owner of the Steele Creek Caf, a friendly, fast-food place in a office park environment. It is his third restaurant endeavor. Today’s restaurant industry is challenging, says Kavopovis, and finding loans for growth is part of the challenge. “Once upon a time you could put the equipment up for collateral, but times have changed,” he complains. “Banks are not lending money for restaurants that often.”
Nonetheless, Kavopovis has managed to build a flourishing business through the creative use of loans – both traditional and otherwise. He built and owns the building in which the Steele Creek Caf operates, and owns another building – formerly the home of a his first pizza restaurant.
Balancing Act
“Restaurants are hugely capital intensive,” says Lesley Kohn, a principal at Nextaurant, Inc. of San Francisco. “So there are some wonderful ways to leverage debt.” Nextaurant works with chefs and owner-operators on budgeting, fundraising, and operations. She has no lack of ideas and advice about using loans.
“Look at it holistically; too many companies are underleveraged,” Kohn says, referring to debt’s ability to multiply an owner’s profits without additional out-of-pocket cash. A holistic view of the business includes forecasting the budget for three to five years, understanding your personal income needs, and balancing the amount of debt with other factors, including cash flow and equity capital invested.
The one weakness Kohn sees most often among restaurateurs? “People in the restaurant business don’t do enough of running their numbers,” she says. “You have to have a sound budget to know what you’re going after.”
If a business owner knows how much money is needed in the long term, and how much profit (or cash) will be left over to make loan payments, then securing a loan will be much easier. Kohn says she has helped secure debt from a variety of sources, but the basics are the same – to be able to borrow money, you have to be able to show how you will pay it back.
Where to Look
When it comes to finding lenders, it helps to think broadly “We’ve dealt with banks, as well as a ton of private sources, ranging from [commercial finance] institutions, the SBA, friends, family, angel investors, and other high net worth individuals,” says Kohn.
Each source of capital has its own advantages and disadvantages. Banks and commercial finance lenders tend to have higher rates of interest, while individual investors may want to have a say in how the business operates. Borrowing from friends and family, of course, can lead to trouble in all kinds of ways.
Nonetheless, it is sometimes the people that know you the best who are best qualified to loan you capital.
In Jimmy Katopovis’ case, he had two advantages when opening Steele Creek Caf – real estate to secure loans from the bank, and family who could afford to loan him additional capital.
“I got pretty good terms through the bank,” says Katopovis, who borrowed 100% of the construction costs during a period of especially low interest rates. “But the deal was a whole lot sweeter from my dad,” he grins. “That didn’t cost me any interest.”
A successful recipe
Using personal assets as collateral for a restaurant loan, as Katopovis did with his real estate, is an important strategy to consider, says Kohn. But, she warns, mixing the various interests of the restaurant, the owner, and other investors can get messy. “Everything is project dependent. You can put up personal assets, but talk to somebody who understands how to balance debt and equity. Talk to somebody you trust and come up with something that makes sense.”
Finding the right sources of funds, while balancing the restaurant’s ability to repay loans and compensate owners, is one of the hardest problems of any business. Because restaurants require so much capital, the challenge is magnified. “This is not an easy, quick fix,” adds Kohn. “These are some of the most complicated things: capital is the fuel of your business.”
Katopovis is looking forward to his next restaurant project, and says that debt will again play a large part in getting it off the ground. Never mind that his is, in his own words, “pretty tapped out.” No doubt he will manage to mix up a new formula. “I’ll probably go through a bank, and this time a signature from my dad will be the collateral,” he says. “He’s been my backbone.”
Business owners looking for unique strategic finance and funding advice should click through to http://www.dworrell.com where author David Worrell provides free tools and tips. Worrell specializes in helping business owners discover the true cash flow, profits and wealth that are hiding inside their business. At http://www.dworrell.com, entrepreneurs can get David’s free report, “The Colors of Money” — 27 pages chock full of secrets to finding the cash you need to grow your business.
Author: David Worrell
Article Source: EzineArticles.com
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