How to Find Investors & Raise Startup Capital for Your First Restaurant

How does one go about finding investors? What will they want in return? How much do you have to give up to a prospective investor? These are questions we hear over and over again. But these questions are hard to answer with a single, uniform response since investment relationships vary from one deal to the next. What works in one scenario doesn't necessarily work in another.

One of the greatest misconceptions of first-time restaurateurs is assuming that prior business experience and a good business plan will be sufficient to get a bank loan. They wrongly suppose that the restaurant, once completed, will serve as the primary collateral for the loan. Then they're unhappily surprised after the loan officer tells them that they have a good business plan, the restaurant concept looks like a "slam dunk," and the numbers are believable, but the only way they can get a loan is by putting up more collateral.

One operator put it like this: "Banks are not in the risk-taking business! I thought that being in the business for years as a manager, and the ability to show a proven positive cash flow would be enough. It was not. The banks were most interested in what would happen if I walked away. What are the real assets that they could get their hands on to protect their investment."

Before borrowing money from a friend it's best to decide which you need most. ~ Joe Moore

For some, this means they have to get a second mortgage, dip further into their savings, or get a loan against their retirement account. For others, they might seek a relative's help either as a guarantor, investor or lender.

This practice is evidenced by the results of two surveys conducted among members of RestaurantOwner.com. Respondents who spent $100,000 or less on opening their restaurant cited as financing sources, their savings accounts, home equity loans, borrowing from relatives and "maxing out" their credit cards.

But what if your restaurant idea will cost $200,000, $500,000, or even $1 million? The fact is, out of more than 400 survey respondents, the average spent to open their restaurant was around $450,000, and in both surveys the median spent was $200,000 to $225,000. The huge gap between the median (this means that half the respondents spent below this amount and half spent above this amount) and the average can be attributed to several respondents spending way more than $450,000 to finance their restaurants.