A New Restaurant

I know I’ve mentioned this before, but it’s worth repeating; restaurants are risky business.  You know it, I know it, and the lenders know it.  That’s why it is critical that you have done your homework before you go to the banker for financing.

Here’s how the conversation goes:

You: I’m looking at opening a business and I need to talk to somebody about lining up my financing.

Banker: We would love to help you.  what kind of business are you thinking about?

You:  I’ve got an idea for a great restaurant concept.

(Silence)

Banker:  Ummm… A restaurant?  Let’s see what we can do?  Do you have any restaurant experience?

Be prepared for the fact that loans for restaurants have a higher bar for qualification.  A credit score that might qualify you for a regular business loan will be a little higher for restaurants.  Depending on which financial institution you go to, the requirements can be very different.  One bank I spoke to offered an SBA backed line of credit with nothing down, no business plan of a line under $100,000, interest rates between 6.5% to 9%, but you needed a credit score of at least 750 to qualify.  The next bank wanted a credit score of 640, but they wanted 20% down, a business plan with 2-years projections, and an interest rate of 9.5%.

In general, the easier it is to get the loan, the more you are going to pay in the long run.

Things are starting to look up in my quest for my own restaurant.  I have stumbled across a property that may be what I am looking for.

One of the things that stand between potential restaurant owners and their dream is the ability to finance the operation.  Starting a restaurant from scratch has a huge start-up cost.  Unless your personal finances are in excellent shape, it is very difficult to raise the needed capital.  Because of the high mortality rate of new restaurants many lenders have higher requirements for new restaurant than they have for other forms of business.  Without the start-up capital, your dreams are dead in the water.

One way to reduce the start-up costs is to get into a place that is set up for a restaurant.  That’s what I stumbled across last week.  The restaurant that had been there wasn’t there for very long.  People that had eaten there said the food wasn’t good, and it was in direct competition with another restaurant that anchored the plaza it was located in.  Then the couple that owned the business went through a divorce, and that was the end of the business.

The location is a little bit larger that I was initially looking for, so I need to be careful running the numbers to make sure my business model can support a higher lease rate, but it is in a good location, it’s the end unit of a small plaza and has great visibility, and it has a lot of daily traffic going past it.

Because the exhaust system and most of the equipment are already there it will reduce some of my start-up costs.  There is a bit of remodling to be done, and it’s not the most ideal kitchen design, so I will need to make sure my menu can be supported by the kitchen.

Be sure to check back for updates.  I will keep you posted as I continue to develop the restaurants concept, and as I develop my business plan.

I was watching the Major League American League playoff game between the Cleveland Indians and the New York Yankees.  As I was watching, it struck me that most restaurants are a lot more like the Indians than they are the Yankees.

The Yankees are a ball club with the resources to field a team that is in the running for the championship every year.  They have the highest payroll in all of baseball.  When something they are doing isn’t working, they spend the money to fix the problem.

The Cleveland Indians have a payroll that is less than one-third what the Yankees spend.  They built their team slowly, developing the talent in young players that are now competing against one of the most successful ball clubs in baseball history.  They have had to spend their money carefully, with a lot of thought going into every move they make.

Most new restaurants, like the Indians, have limited budgets to work with.  You don’t have the resources to be able to spend your way to success.  Decisions have to be made on which type of advertising to use.  You need a new sign that is more visible from the street, but you also need anew broiler, and you don’t have the money to buy both.  It’s something you have to deal with every day. With a little more money, you could_____ (fill in the blank).

You make decisions that you think are best for your restaurant.  You rely on a great management team that can develop your talent, and you slowly build your business.  Over time, with good investment decisions, your business grows, and maybe, one day, your restaurants name gets mentioned as one of the best.