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Dos and Don’ts of Restaurant Financing

Whether you’re taking your restaurant to the next level or you need extra funds to weather a financial storm, we’ll tell you what you need to know about taking out a loan for your eatery.

Loan Advice February 4, 2016

Keeping a restaurant fiscally afloat is one of the toughest jobs in the country. Consider this: 59-percent of hospitality facilities go under within their first three years. And even if you manage to survive longer than that, running a restaurant is never smooth sailing. You’ll always have to deal with customer retention, off-seasons, competition, and other market pitfalls just waiting to absorb your business. Even when your restaurant is thriving, there’s never time to rest your laurels because that’s when disaster is sure to strike.

With the odds for success overwhelmingly against you, it seems like bad business to take out a loan for your restaurant, since that loan money could end up being the debt that finally strangled your business into oblivion. Or maybe not. The difference could be how hard you plan for your restaurant financing beforehand. So before you turn to a loan, be sure to ask yourself a few very important questions.

1. How Much Do You Need the Money?

This is kind of a trick question. Because if you really, really need the money, then maybe you shouldn’t get the loan. This might be a warning flag that your business is failing and it’s time to jump ship. Accruing more debt might just hurt you more in the end.

On the other hand, if you can survive without the loan, then you might be better off without it, too. Loans almost always come with fees and interest. So if you’re on the fence about how much you need the money, then you should definitely ask yourself this next question.

2. How Are You Going to Make Money with the Loan Money?

If you need the money to battle an unsurmountable amount of debt, then you probably aren’t thinking about how you’re going to use the money to make money. We’re sorry, this is a terrible position to be in.

Hopefully that’s not where you are. Ideally, you have a business plan set out that confidentially puts you in a position to make more than you plan to borrow (even when you factor in the interest and fees). This is a good position to be in.

You might benefit from having another set of eyes look over your business plan. If it makes sense, consider hiring a consultant to make sure the loan will help your company as much as you think it will. They may be able to help tweak your plan so you earn more money. Or, they may be able to warn you about potential oversights on your part.

Speaking of that plan, if it includes buying new furniture and equipment for your restaurant, you might want to think again …

3. What Will You Spend the Money On?

Experts in the restaurant industry have suggested that used equipment can be a better investment than new equipment. So if you plan on using your restaurant financing to fund a brand new oven, maybe you should buy it second hand instead.

This article would be a thousand pages long if we tried to go through all the items you could spend your loan money on. Suffice it to say that you should always consider other options.

That brings us to a major point – is there any chance that you can move some money around and avoid the loan altogether? Or, if you can’t, could a financial expert do it? If so, it’d definitely be worth it to hire that consultant we were talking about earlier.

If you aren’t convinced, here’s some wiggle room an accountant might be able to find in your current finances:

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  • Rent – Are you paying too much for rent? If yes, negotiate with your landlord and save yourself some money.
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  • Insurance – If you haven’t recently updated your labor figures with your insurance provider, then you’re probably paying too much for insurance.
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  • Digital reporting – The more you information log digitally, the easier it’ll be to report and examine. That means you’ll waste less time with compliance reporting and you might be able to more-easily figure out ways to cut costs, since the data will be more accessible.

But even the best consultant won’t be able to help you if you haven’t been paying attention to your competition. Which brings us to our next question …

4. How Will this Loan Help You Beat Your Competition?

Never, never take out restaurant financing before you’ve done some serious market research. Failure to know what the competition is doing is one of the biggest reasons restaurants fail. Yes, you should have a vision that’s all your own, but it’s foolish not to check and see how that vision compares to your direct competition.

I’m reminded of two burger joints from my hometown. One of them launched a BOGO night one day on Tuesdays. The other restaurant wasn’t paying attention and a couple weeks later they launched a campaign of their own. “Buy one get one half off on Tuesdays.” The second restaurant poured a serious amount of money into their doomed campaign, advertising it through mailers and whatnot.

It became a joke around town. On Tuesdays you had to decide if you wanted a free burger or one that was half-off. The restaurant that hadn’t been paying attention to their competition had inadvertently branded themselves as a fool.

They survived but you probably won’t if you don’t pay attention to what your competition is doing.

5. Will You Use Some of the Loan Money to Advertise?

You’ll only succeed with a good marketing campaign. Even if the loan has nothing to do with advertising, it should. As you plan out your next marketing campaign, remember to play to your strengths and design the ad to appeal to the customers you already know you have, as well as to those you want.

This assumes that you know your customers. Many restaurants do not fully understand why their customers actually choose their restaurant. This is a recipe for disaster, since you may be just one shift away from alienating your patrons. Get out there on the floor. Find out what makes those eaters tick. Then, double down on what you’re doing right and let the world know about it through advertising.

Many successful eateries have used restaurant financing to become more successful. Many more, however, have let an unsecured business loan be the downfall of their livelihood. But we don’t need to convince you of the gravity of the situation. You know how significant this loan decision is. We only hope that our suggestions will help you make the right decision and then make the more money in the long run. Please reach out if you have any questions about this important choice. If you’re ready to request your business financing right now, we can help with that, too.

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