The Best Way To Fund a Restaurant

Opening a bricks and mortar restaurant is a dream shared by many passionate foodies across the country. However, knowing how to open a successful venue may seem like black magic. Famously, the restaurant industry is one of the hardest to navigate, last year alone 1,100 unfortunately shut their doors and last month we received the sad news about Jaime’s Italian. But we know that won’t put you off!

We have been working with some fantastic restaurateurs, such as Pranee and Andrew Laurillard featured in this blog piece. The husband and wife duo started Giggling Squid and have scaled it to 30 restaurants becoming the UK’s largest Thai chain. Proving that correctly funded restaurants are not only surviving the tougher economic climate but thriving.

Where to Start?

When a restauranteur looks to open his first site it’s not just the menu that is vital, the branding, marketing, hiring staff and finding a location are all major considerations. Then comes the question, how do you pay for all this?

The amount of funding required to open a restaurant can vary by hundreds of thousands of pounds, depending on location and specification. Getting the money right might just be the difference between staying open past the hallowed first year of trading or not. The Laurillard’s attribute part of their success on getting this bit right.

In this article we discuss the main sources of restaurant funding that are available to passionate foodtrepreneurs. In fact we show those looking to open the next big thing that they have multiple options available to them. However, there is never a simple answer on how to finance a restaurant, since each and every restaurant varies more to the next, than the dishes on their menus.

Cash and Remortgaging

If you have successfully opened an initial restaurant concept and eager to open a second site, you could use the business’s cash to fund a second site. If this is your first restaurant and do not have cash in the business, you could put your personal savings into the business. And if you don’t have significant savings you could always remortgage your home to release some funds.

If your restaurant or bar has a large amount of cash in the bank to use to fund a second site, this is always going to be the cheapest form of funding, likewise with savings. Remortgaging your home is also another cheap way to raise capital, because the bank will have a first charge on an asset which tends to appreciate over time, so can be seen as a “safe bet”.

Like that 0.74p phone cover you bought on Amazon, cheap is not the best, especially not in this case. If your new restaurant location can be funded with a fraction of the cash in the business bank account then this should be a consideration. However, if the new restaurant consumes more than half the businesses liquidity then you are entering a dangerous territory. Cash, should be retained for a rainy day to cover costs such as staff wages, stock costs, late payments (as discussed in this article), down months and other unexpected costs.

With savings and remortgaging you are in similar hot water. By putting your savings and your home on the line, it does show commitment to your business but at what cost? No matter your certainty of success, there is always the chance that things might not go to plan and you could have your home repossessed and your lifetimes worth of savings wiped out. Not all businesses are run by husband wife partnerships like the Laurillard’s Giggling Squid. If your restaurant isn’t a joint venture, you will be endangering your husband or wife’s retirement too.

Friends and Family

Alternatively, you could look to friends and family to help finance your restaurant or bar venture.

When going to friends or family for funding for your restaurant, you are putting not only their capital at risk but also your relationship with them. This can be a successful form of funding but equally you have to ask yourself if you would want to jeopardise this bond and any collateral damage. CBS News have covered 5 Dangers of Doing Business with Family and Friends, which is worth the read before you head down this route.

Business Bank Loan

If none of these are an option or you have decided it best not to risk your relationships with friends and family, your next option would be to fund the opening of the restaurant in the form of a business loan from a bank. This is one of the biggest forms for restaurant funding, and if available it is definitely an avenue worth pursuing. It is slowly, however becoming a bigger and bigger IF. Banks lending criteria are becoming increasingly strict, meaning that getting a loan will get harder the more the restaurant industry gets slammed by the press.

It is also worth reading this Testimonial from GSM client, Grand Central Sound Studios FD, Ivor D. Taylor:

"A Bank lends you an umbrella for a rainy day when it's sunny and then wants it back when it rains.  GSM gives you an umbrella on a rainy day and lets you keep it so you don’t get wet."

In almost all bank loans, in the T&C's, they will remain the right to recall the bank loan at any point. Although it is rare for banks to do so as it damages their reputation, it remains an option. This recently caught out one of our non-restaurant clients, fortunately GSM were able to tailor a re-finance deal to raise the funds to cover the shortfall.

Private Equity

As covered in the Giggling Squid article, Private Equity is another route, despite the Lauriallard’s advising against it. It is a popular funding route and can have it’s benefits. Byron, the burger chain, for example experienced extreme growth when Hutton Collins Partners, a private equity firm, bought the chain for £100million in 2013. Over the last year however, Byron have struggled to remain out of the spotlight as the banner boy for CVA’s and failing over-expanded-restaurant-chains. This is probably what Andrew Laurillard was referring to when deciding to not take the Private Equity path early on.

The other consideration for Private Equity (and funding through friends and family) is the dilution of equity. For example, if your business needs a £50,000 kitchen fit out, your investment partner may ask for 25% of the business in return for their investment. This may seem like easy money but it may not be a smart option. It should be seen as 25% of your hard-earned profits for the rest of your business’s life. A potentially painful option, when the fit cost could have be paid off in two years through a flexible tailored payment plan. On top of the annual slice of the pie, consider at some point, someone may want to buy your successful restaurant chain, like Hutton Collins Partners did with Byron, at the point of sale a 25% stake in Byron was worth a fair amount more than that kitchen fit out.

Asset Finance

It is why at GSM Finance, with all these options weighed up, we believe that the most robust form of restaurant funding is asset finance. As London’s leading asset finance broker, we have found finance for hundreds of restaurants, enabling their concepts get off the ground. With asset finance, either through hire purchase or equipment lease, we are able to secure funding for everything your first, second, third or umpteenth restaurant needs to open its doors.

The hospitality and leisure clients we serve are always surprised by what can be funded through asset finance, from all the kitchen equipment, to the table and chairs your guests sit on, even the flooring, partition walls, bathrooms and interiors required. Asset Finance should be considered a financial tool by UK SMEs to fund growth without diluting equity.

We are also here to help start-up restaurants get the funding they need to bring their concept to market. Finding finance for a start-up restaurant is becoming increasingly difficult, mainly due to the constant stream of negativity seen in the press regarding high street casual dining chains. It’s also no secret that banks are shying away from lending to these ventures, making it even harder for start-ups to get on their feet. Not only is the end result normally a no, but banks infamously take weeks if not months to come to that conclusion, sometimes resulting in a squandered opportunity.

At GSM we are here to help no matter what your situation. We can arrange restaurant finance from £10k to £5million and can have a decision with you within 48 hours. We have 20 years industry experience and have worked with some of the UK’s biggest restaurateurs, like Gordon Ramsey for instance. To see who else we have helped head to our Clients and Testimonials page.

Our aim is simple: fast, friendly and efficient finance.

If you would like to find out more about how GSM can help fund your next restaurant, simply head over to our Contact page and get in touch!