For a restaurateur, embarking on the journey of opening a new restaurant is both exciting and challenging. One of the most critical aspects of starting a restaurant business is understanding and managing startup costs. This article will provide a comprehensive overview of the various expenses associated with opening a restaurant and offer tips to help prospective restaurant owners navigate this process (and how to finance a business in the restaurant industry).
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New Restaurant Expenses
Developing a Business Plan
Before diving into specific costs, developing a detailed business plan for your restaurant is essential. The business plan should include information about your restaurant’s concept, target audience, menu, and location. This plan will help you understand your market and competition and serve as a roadmap for managing your startup costs.
Location and Real Estate
Securing a commercial space is one of the most significant expenses for new restaurant owners. The cost of renting or purchasing a location depends on factors like the size of the space, its location, and local real estate prices. You’ll be paying by the square foot in both the front and back of house, so you’ll want to know how much space you need in both areas. Restaurant owners should also consider additional costs such as security deposits, renovations, landscaping, and occupancy fees.
A well-equipped kitchen is the heart of any restaurant. Essential restaurant equipment includes ovens, stoves, fryers, refrigerators, freezers, dishwashers, and mixers. Depending on the type of restaurant and its menu, specialized cooking equipment such as pizza ovens or grills may also be necessary. Remember that high-quality equipment can be costly, but it’s often worth the investment in the long run.
Dining Room and Ambiance
Your customers will experience your restaurant’s atmosphere and service in the dining room. It’s entirely possible to overspend on the back of house while your customers experience a lackluster restaurant space. Expenses related to the dining room include furniture, linens, glassware, and décor. Additionally, consider the costs of creating a comfortable ambiance, such as lighting, artwork, and music systems.
Point of Sale System and Payment Processing
A reliable point of sale (POS) system is crucial for managing transactions, tracking sales, and maintaining inventory. Restaurant owners should research various POS system providers and consider the costs of hardware, software, and payment processing fees. Additionally, be prepared for credit card transaction fees, which can impact your profit margin.
Signage and Marketing
Attracting customers to your new restaurant requires investment in signage and marketing efforts. This includes exterior and interior signage and promotional materials like business cards, menus, and social media advertising. Don’t underestimate the power of a strong online presence, which can be essential for reaching potential customers.
Licenses, Permits, and Insurance
Opening a restaurant requires obtaining various licenses and permits, such as a business license, food service license, and liquor license (if applicable). These costs will vary depending on your location and the type of restaurant you’re opening. Restaurant owners must also invest in insurance policies, including general liability, property, and workers’ compensation insurance.
Food and Beverage Costs
Food cost is a significant expense for any restaurant. Be sure to account for the cost of ingredients, as well as the cost of maintaining appropriate inventory levels. The type of restaurant and menu items will directly influence food costs. For example, a high-end restaurant focusing on fresh, locally-sourced ingredients will likely have higher food costs than a fast-food establishment.
Labor and Staffing
Hiring and training staff is another essential expense for new restaurant owners. Consider the costs of salaries, benefits, and uniforms for your employees. Remember that the size and type of your restaurant will influence the number of staff needed.
Grand Opening and Ongoing Expenses
Launching your restaurant with a grand opening event can help attract attention and build excitement around your new business. Budget for promotional materials, entertainment, and food and beverage costs associated with the event. Additionally, plan for ongoing expenses such as utilities, maintenance, and cleaning supplies.
Technology and Online Presence
In today’s digital age, having a robust online presence is essential for any business, including restaurants. Allocate funds for developing and maintaining a professional website, social media management, and online reservation systems. Remember to account for costs associated with email marketing, search engine optimization, and online advertising.
Contingency Funds and Unexpected Expenses
It’s crucial for restaurant owners to have contingency funds set aside for unexpected expenses or emergencies. This could include unforeseen repairs, equipment replacement, or fluctuations in food prices. Building a financial cushion can help your restaurant navigate potential setbacks and maintain financial stability.
Evaluating Costs by Type of Restaurant
Startup costs will vary depending on the type of restaurant you’re opening. For example, a food truck or pop-up restaurant typically has lower upfront costs than a full-service restaurant. Conversely, fast-food establishments may have lower food costs but higher expenses associated with branding and marketing. Assessing the costs of your restaurant concept will help you create a realistic budget and set your business up for success.
Financing Restaurant Startup Costs
Restaurants can fund their expenses through various financing options, depending on their needs and qualifications. Here are some common financing options for restaurants:
Term loans are traditional loans that provide a lump sum of money to be repaid over a fixed period, typically ranging from one to ten years. They can be obtained through banks, credit unions, or online lenders, and are a suitable option for restaurant owners who need substantial funding for startup costs or expansion plans. Interest rates and repayment terms will depend on the borrower’s creditworthiness and the lender’s specific criteria. Be sure to prepare yourself for a mountain of paperwork if this is the route you want to go. Business plans, business credit reports, income tax returns, financial statements, AR/and AP documents are usually needed, as well as collateral to secure a bank business loan.
The Small Business Administration (SBA) offers several loan programs designed to help small businesses, including restaurants, obtain financing. The most popular is the SBA 7(a) loan program, which can provide up to $5 million in funding for various purposes, such as working capital, equipment purchases, and commercial real estate.
The application process can be lengthy, and meeting the eligibility requirements can be challenging for many businesses. If you have any kind of criminal record, this option is nearly impossible. Additionally, those with poor credit or no collateral will find acquiring an SBA loan difficult.
Alternative Financing: Merchant Cash Advances (MCAs)
MCAs are an alternative financing option for restaurants that may not qualify for traditional loans or need quick access to funds and are typically available to restaurateurs after operating for 3-4 months. Merchant cash advances (MCAs) are not loans, instead, Business owners get the money as a lump sum of cash up front, and repayments are made daily or weekly based on an agreed upon share of the revenue. MCAs offer fast access to cash, and if your revenue happens to dip, so do your payments making this a flexible option for many business owners.
Starting a restaurant involves many expenses, from securing a location and outfitting the kitchen to marketing and staffing. By carefully researching and planning for these costs, restaurant owners can set realistic expectations and be better prepared to navigate the challenges of opening a new business. Remember that every restaurant is unique, and costs will vary depending on location, concept, and menu offerings. However, with careful planning and consideration of these expenses, you’ll be well on your way to launching a successful restaurant venture.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.