“My friends say I make the best barbeque ribs ever and should open my own restaurant …” were words I often heard in initial calls from potential small business owners when I was a business consultant. Now as an SBA/commercial lender, I still have many calls with potential restaurant startup customers that begin this same way.
Yes, when considering opening a restaurant “the food is the thing” in the same way as Shakespeare wrote “the play’s the thing.” An enthusiastic, potential restaurant owner with a passion for her or his menu is an excellent character trait. However, restaurant loans are one of the highest risk-rated industry loan categories. Any potential restauranteur needs to consider the following prior to beginning the loan application process.
• Business Experience
You don’t need to be a previous restaurant owner, but you must have some financial management experience, or have a committed management-level person who does have relevant restaurant experience regarding day-to-day management, inventory control and staff management. The ability to make a delicious meal is wasted if you can’t keep the doors open, don’t have the proper ingredients available at all times and can’t manage quality servers with great customer service skills.
• Competition Forces
The fact that “there is no restaurant anywhere nearby that offers what we will” doesn’t mean you will be an overnight success. The reason that type restaurant isn’t in your area may be there is no valid market demand for it. At the same time, don’t be scared that there are too many like-fare restaurants here already. If you have a unique value proposition (UVP) not in the current market (none with offerings like it in that part of town, none with this certain type of atmosphere you will create, or that offer free, easy access parking, or cater to families with small children, etc.) then your UVP may be what attracts customers away from their former favorite dining spots not just your rare or special dishes.
• Other Options to a New, Independent Restaurant Model
Consider all the options that may help make the loan risk rating a lesser factor. For example, is there a possibility of a franchise operation for this area, can you open a new location in partnership with an already established, successful restaurant in another town that has your locals travelling there, or could you start by selling wholesale foods first to other restaurants or local food stores to test the market and build a brand? This last option could lead to wholesale sales once the brick and mortar restaurant opens, thus helping to ease seasonal cash flow issues faced by all restaurants. Franchise companies can provide market research and answer many “unknown” variables with data from other “like” stores. These three options can also present “downsides” such as franchise oversight from a national office, issues connected to partnership decisions, and the need for extra equipment for wholesale production, so weigh the options depending on your vision.
Note that all the standard lending issues will still matter such as being a credit-worthy borrower, the amount of cash infusion or other collateral available to pledge toward the project, and the preparation of a solid business plan and three-year pro forma statements.
Financial management experience analysis, competition research and exploring the types of restaurant operations available are the first steps to consider prior to seeking funding from a lender. The restaurant industry growth in Northwest Arkansas the past few years has been amazing and exciting, but the public doesn’t see all the hard work, research and planning that must take place prior to the ribbon-cutting day.
Network with other restaurant owners and seek the advice of lenders with experience in food industry, commercial lending to assist you in this journey.
Editor’s note: Martha Londagin is a former business consultant with the Arkansas Small Business and Technology Development Center at the Walton College of Business, and an SBA/commercial loan officer with Legacy National Bank based in Springdale. She is also a licensed attorney in Arkansas and Oklahoma. She can be reached at firstname.lastname@example.org. The opinions expressed are those of the author.