Debt vs. Equity Financing: Which is Right for Your Restaurant?
Updated: Jan 10, 2022
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If you’re in the planning stages of starting your restaurant or are looking ahead to a big project, you’re probably thinking about how you’re going to pay for such a big change. Makes sense, since opening a restaurant from scratch can cost anywhere from $95,000 to $425,000, depending upon what goes into it.
Unless you’ve got a spare half a million lying around, you’re probably looking to outside sources for funding, whether it’s a bank or an investor, or another form of restaurant financing. But is one way of financing better than another?
Let’s break down what it means to look for equity vs. debt financing, weigh the pros and cons, so you can make the best decision for your restaurant’s success.
Equity financing is when someone (or a group of people) purchases ownership of your restaurant in exchange for an investment. Usually, these are folks invested in the long-term growth of your business, and they’ll be expecting shares in the profits as your restaurant grows.
There are several different types of investors and ways to find them, but as you seek out equity investors you should keep some things in mind.
Equity investors sometimes want to have a say in how the restaurant is run, as part-owners, so you should find investors who are aligned with your values and purposes in order to ensure smoother sailing ahead. You should make sure they have a good history with investments and are appealing to other investors who might also want to jump on board.
There are several pros to getting equity investment. Namely, it’s a way of getting an influx of cash relatively quickly. Investors also tend to loop in their networks to their investments, so you could expect some new customers, potentially.
The main disadvantage that comes with equity financing is that, well, you’re no longer the sole owner of your restaurant. You don’t get all the profits, and you might have to make some compromises on how things work.
Debt financing is probably the most common way small, independent restaurants get the capital they need to get going or expand their business. Usually, this takes the shape of a loan from a bank or a small business association, but debt financing can take on many forms - including crowdfunding!
If you want to look into debt financing, there might be several restrictions placed on you. For one, many banks and small business associations don’t like to give out restaurant loans to young businesses. They usually want you to have been in business for at least two years. This makes it pretty difficult for restaurants that are just starting out to get capital!
An advantage to debt financing is that you retain total ownership over your restaurant. While yes, you’ll be paying off the restaurant loan for a while, it’s only temporary, and you have more control over what you do with your profits and the operation of your restaurant.
One unique form of debt financing is debt crowdfunding, like Honeycomb Credit! Crowdfunding carries all the advantages of debt financing, with some added benefits as well.
If you crowdfund a restaurant loan, you essentially are getting capital from your social network - your friends, family, and biggest fans. This by itself is pretty cool, but the fact that you can unlock capital for yourself and then also help your community get a return on their investments makes the deal even sweeter.
Crowdfunding can also be a lucrative marketing tool - it’s a way of putting your restaurant’s story out there and inviting people to be a part of it. People who invest in your campaign are more likely to become customers, or what we like to call brand advocates who encourage their friends to give you their business as well!
Did we mention that many of the common roadblocks restaurateurs face when looking for debt financing don’t exist through crowdfunding? While we look to make sure you’re in good financial standing, the age of your business doesn’t matter to whether or not you can get a loan.
You also don’t have to put up any collateral (though sometimes it’s recommended to keep your interest rates down). Even more, it typically takes far less time to get approved and ready to go on your crowdfunding campaign than it does for getting a bank loan processed - so you can get the capital you need quickly!
As if that wasn’t enough, one of the biggest pulls that debt crowdfunding has is that the winning combination of improved customer relationships, influx of capital, and marketing to new audiences, leads to increased revenue! Businesses that crowdfund with Honeycomb on average see a 60% hike in revenue.
Gain the relationship of having investors, yet retain the ownership
Crowdfunding a restaurant loan is a way you can have the best of both worlds when financing your restaurant. You can get the capital you need and win the loyalty and patronage of your customer-investors while staying independent and true to yourself and your restaurant!
Learn more about restaurant crowdfunding with Honeycomb Credit at www.honeycombcredit.com/restaurant and sign up below for more information!