While slowly recovering from cash flow challenges, new restaurant owners are still trying to find a way to enter the market and compete with well-established restaurant brands or local competitors. In fact, a majority of restaurants fail in the first five years (Source), as making smart decisions about liquidity management and where to invest money can be rather difficult. This blog post provides an overview of the various options available to restaurants, bars, cafes, snack bars and beer gardens.  

What is restaurant financing?

When we talk about restaurant financing, we mean the raising of funds. Generally, the money comes from external capital providers, so a source from outside the company itself.  

On the one hand, financing can take the form of a loan or credit. In this case, one pays back the received money in instalments over a certain period of time. On the other hand, there’s the option of equity financing, where an investor buys shares in the company. As a result, the investor owns a part of the company.  

Especially for the first option, various financial services can be used to access additional funding sources. Below, we gathered the advantages and disadvantages of the various financing options.

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Restaurant owners have different options:

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The classic bank loan

When people talk about loans, the first thing that comes to mind is banks. Getting a loan through a bank is still a popular way to secure financing for your business. However, applying for a loan at a bank often involves a long and tedious process.  

Banks require certain basic conditions before granting loans:  

• Creditworthiness  
• Collateral  
• Interview with a bank advisor  
• Plans for what the financing will be used for  

Furthermore, with a bank loan, it can take several days or weeks before the money arrives in your business account, making this type of financing unattractive for short-term cash shortages. However, bank loans can be especially attractive for established hospitality businesses with significant financing needs, such as opening a new location.  

Due to the low-interest rate policy of the European Central Bank in recent years, restaurant owners with a good credit rating and sufficient collateral were able to benefit from very low-interest rates at times.  

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Support programs with favorable conditions

There are several funding opportunities, particularly for young hospitality businesses. Various federal states have special programs to help restaurants. Nationwide, the KfW development loan is very popular. The KfW loan is available through your own bank and has better conditions than a standard bank loan.  

With the KfW ERP-Gründerkredit - Startgeld, restaurant operators who have been in business for less than five years can obtain a loan with preferential conditions. The loan can be requested for various purposes, such as materials and inventory, investments, working capital or for purchasing a company or company shares.  

The KfW covers 80% of the credit risk. This reduces the risk of high-street banks, making it easier for restaurant operators to access financing, as less collateral is required. In addition, the KfW loan can be used to cover up to 100% of the investment costs.  

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Personal loans - liquidity from one's personal environment

Another popular way to improve the cash balance of one’s restaurant is through family and friends. There is usually no need for elaborate planning and detailed accounting statements when receiving financing from your family and friends. If you want to resort to this type of financing, your family or circle of friends must of course have the necessary funds and be willing to provide them to you.  

To get a loan from your personal environment is certainly the most unbureaucratic way to obtain additional financing. However, there are potential downsides if you choose to go this way. If you do not manage to repay the money in the planned period or even go bankrupt, the friendship or family relationship may suffer. Therefore, one should think carefully before resorting to this type of financing.  

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Leasing - use without ownership  

Leasing can be an attractive option when financing a new piece of catering or restaurant equipment. Especially for expensive kitchen equipment, it is worth taking a closer look at leasing. This type of financing allows restaurant owners to use kitchen and restaurant equipment without owning it. The principle is very similar to leasing a car.    

There is far less bureaucracy involved with leasing compared to a bank loan. In addition, the new equipment can generate part of the repayment instalments itself since it can already be actively used in day-to-day operations. This ensures better liquidity and more flexibility for further investments.  

Another advantage is that the leasing instalments are tax-deductible. The restaurant owner usually has two options at the end of the leasing period. Either the restaurant equipment can be purchased for its residual value, or it can be returned to the leasing provider. This means that the restaurant operator does not have to decide from the outset whether the equipment will become a permanent part of the kitchen or the restaurant in the long term.    

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Revenue-based lending - Flexible revenue-based financing

Another option available to restaurant owners is revenue-based financing. Fintech companies usually offer this type of financing. Here, companies' sales data is analyzed, and a financing offer is made based on the business’ revenue. This means that the sales of the last few months directly impact the amount of the financing offer.  

The repayment of this type of financing is usually dependent on the revenues. Each month, a certain percentage of the company's revenue goes toward repayment. As a result, a company repays different amounts per month depending on its sales for that month.  

Almost all providers offer a fully digital application process, which spares applicants from having to deal with a lot of paperwork and business plans. In addition, since the financing is revenue-based, no collateral is required. This allows you to submit an application in just a few minutes and, ideally, have the money in your account the next day.    

Furthermore, there are providers, including Get Raoul, where the restaurant owner is free to choose the purpose for which the financing is used. The money can be used for marketing, inventory, hiring additional personnel or whatever is pending at the moment. This is a big difference from a classical bank loan, where the intended use must be defined from the outset, and loans for marketing are often still difficult to obtain.  

This option is particularly suitable for short-term financing needs, as repayments usually only run over several months up to a maximum of a few years.  

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Crowdfunding - reconciling marketing and financing

For larger redesigns or new openings, it can be worthwhile to take a closer look at crowdfunding. This method allows you to collect smaller sums of money from a large number of people. In return, the restaurant owner can organize a dinner for all those who have contributed to the funding.  

It should be noted that this option is especially interesting for restaurant owners with a good reputation or a very innovative concept. It is often difficult to get a lot of people excited about a project. Therefore, one should carefully come up with a strong marketing campaign and secure some initial commitments before the crowdfunding campaign goes live.  

In case you manage to set up a successful crowdfunding campaign and collect enough funds, this method has the positive side effect of already establishing a small clientele. After all, those who are willing to invest money in a project are convinced by the concept and will surely drop by from time to time for a bite or a drink.

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Investors - money and expertise

Restaurant owners have the option to take an external investor on board. In this case, we talk about an equity investment, where an investor contributes capital and receives a share in the company in return. The invested money does not need to be paid back with this method.  

The main advantage here is that you get cash directly in your bank account but most importantly, you get additional business knowledge due to the investors' expertise in the industry. A good investor can help you create a future-proof vision and drive the company forward.  

However, there is a significant disadvantage:  you can't make important decisions on your own anymore. When someone invests money in a company and has a stake in it, they usually want to have a say when it comes to important decisions. Therefore, before making this decision, be very careful about which investors you will take onboard.

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The ideal financing depends on a case-to-case basis

We have now looked primarily at financing for restaurants which have been in business for a while. For people who are looking to open up a new restaurant, there are a range of other options available, such as brewery loans, which can also be interesting in certain situations.  

Which loan or financing option is most suitable depends largely on your business and on the intended use. Depending on how high the amount is, how long the term should be and how flexible you want to be with the repayment, different options make the most sense.  

If you are looking for short-term funding and consider Revenue-Based Lending as a suitable solution for your restaurant, then discover how other restaurant owners have managed to succeed with Banxware’s solution, or just send us a message here.  

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