How Much Does It Cost to Open a Restaurant?
To get a real-world sense of how much it costs to open a restaurant, it pays to look at actual restaurant data. According to RestaurantOwner.com, the average median total restaurant startup cost is $375,000. The highs and lows of the range are $750,500 and $175,500, respectively. Of course, restaurant costs are highly variable, and your restaurant might fall outside of that range. The median cost is a good ballpark though when you start thinking about how much money you might need to open a restaurant.
How can costs add up so high? Here are some sample costs you might expect to pay when you open a restaurant, in addition to the price you pay for rent, a mortgage or an outright building purchase:
- Inventory: $5,000
- Security deposit: $10,000
- Utility deposit: $5,000
- Escrow fees and closing costs: $1,500
- State Board of Equalization deposit: $10,000
- Business license: $500
- Health department fees: $300
- Department of Alcoholic Beverage Control fees: $2,000
- Working capital reserves: $90,000
Those sample costs already total about $125,000, and you haven’t yet hired any workers, bought any furnishings or secured a location. The point is that a range of costs between $175,000 and $750,000 is a totally reasonable working range of what it takes to open a new restaurant.
How Can I Determine Food Costs and Price My Menu?
Determining food costs and pricing your menu are two sides of the same coin. However, the equation that they are part of can make or break your restaurant. You have to find a way to cover all of your costs of preparing a meal while still building in a generous profit margin. Otherwise, you’ll drive your restaurant into the ground.
Start with the cost of your food items. To use a simple example, let’s say you are pouring a customer a neat shot of Scotch. If a 750ml of the Scotch costs you $30 and you use 45 ml in one shot (about 1.5 ounces), you’re pouring $1.80 in Scotch into that drink. Most restaurants will need to make a 75 percent to 80 percent margin on liquor, so you’ll need to charge about $7.20 to $9 to generate a suitable profit on that drink.
Go through this process with every item on your food menu. For example, if you serve ham & cheese omelets, break out the cost of every component, from eggs and cheese to oil, ham and whatever vegetables you put in. Don’t forget to include all the ancillary expenses that go into the preparation of your food, from worker salaries to energy costs, and distribute them into the cost of your food as well.
What Types of Expenses Should I Expect When I Open a New Restaurant?
Every restaurant is unique, and many have different pricing structures from one another. However, most new restaurant operators need to consider some if not all of these expenses when launching a new business:
- Building expenses — rent, buy or build? Where?
- Interior expenses — signs, lights, music, furnishings, etc.
- Equipment expenses — stoves, ovens, refrigerators, freezers, storerooms, vehicles, etc.
- Supplies — cups, water pitchers, plates, napkins, etc.
- Personnel expenses — worker salaries, staff wages, benefits, health and worker’s comp insurance, etc.
- Marketing — flyers, mailers, web advertisements, newspaper and television ads, etc.
- Capital reserves — some form of financing or cash to get you through your daily expenses
- Licenses and permits — all the necessary legal and regulatory filings
- Restaurant insurance
- Professional consultants
- Technology and processing expenses — credit card payment machines, cash registers, tablets/ordering systems, POS technology, etc.
These are just generic categories, and your restaurant might have additional expenses as well; however, most restaurants have to take at least these basic costs into account.
How Long Does It Take to Receive Funds From Credit Card Processors?
Credit card processing is a way of life for a restaurant, with some patrons unwilling to even visit a restaurant that won’t accept credit cards. The good news is that credit card processing is an extremely efficient way to get paid at a restaurant. Although the actual process is a bit complex — money is transferred back and forth between various banks, with an interchange fee being taken out of the equation along the way — you can generally expect to be paid within 24 hours of a credit card transaction, and no longer than three business days.
Can Any Type of Restaurant Obtain Financing?
Depending on the type of loan you choose, you can finance essentially any restaurant with some type of loan or line of credit. Since lending is such a competitive field, with alternative lenders and online lenders now going toe-to-toe with the mainline, traditional banks, there’s lots of financing to be had at competitive rates.
For more traditional financing outlets, you might be more limited as to what type of restaurant you can finance, depending on your lender. Some lenders might not lend at all to startup restaurants, while others will only charge exorbitant interest rates. Particularly in the startup world, you’ll likely have to shop around various online or alternative lenders to find one who will both work with you and provide value-added services to help your restaurant succeed. Remember, just because a lender is willing to work with you doesn’t mean you have to work with them. Take the time to find the right fit for your business.
Are There Additional Fees Involved in Taking Out a New Restaurant Loan?
As with any type of loan, the answer to the fee question is, “it depends,” both on the type of loan you choose and your lender. Some lenders have no fees at all, except interest.
Other types of financing can be costly. In addition to interest costs, some loans have application fees, origination fees, service fees, closing fees, maintenance fees and other various types of costs, some of which can run into the thousands of dollars.
When taking out a new restaurant loan, it’s important to analyze the total cost of your financing, not just the interest rate you’re paying. If you can get a low rate on a loan but have to pay $3,000 just to get it, it might not be worth the total cost when compared to other options.
What Are Some Common Mistakes Borrowers Make When Taking Out New Restaurant Loans?
One of the primary mistakes that new restaurant borrowers make is to underestimate their need for capital. Restaurants are known devourers of capital, and as the segments above reveal, there are numerous costs you’ll have to anticipate as a new restaurant owner. Although you never want to take on more debt that you can handle, if you don’t get a large enough loan to cover all of your costs, you’re setting yourself up for failure. One of the keys to success is to make a thorough and accurate analysis of all of your potential expenses so that you can raise the needed financing to keep your restaurant an ongoing concern.
Another reason why restaurants fail is that new restaurateurs fail to build in enough profit margin to their restaurant costs. As outlined above, simply charging 10 percent more than your costs for a meal is not a way to earn a 10 percent profit on your business; rather, it’s a formula for disaster.
What Are Some of the Risks Involved in Borrowing to Open a New Restaurant
Television shows make it seem easy to become a celebrity chef, but the reality of “reality TV” leaves much to be desired. The truth of the matter is that without sound financial preparation, it can be easy to lose money on any investment, especially a new restaurant.
The sad truth is that many unprepared entrepreneurs fail to account for all of the costs that accompany the opening of a new restaurant, a mistake that can consume all of the profits of a new business.
Another common mistake is to for new restaurant owners to accept they first loan they’re offered, overlooking important details such as an exorbitant APR or other onerous terms, such as large prepayment penalties.
Still other restaurateurs underestimate the amount of work that goes into the opening of a new restaurant. There are so many moving parts in the restaurant industry that if you don’t have a handle on everything it takes to succeed, you might have to pay outside consultants or other experts to come in and do all the heavy lifting for you. All of that costs money, cutting into your potential profits.
Of course, one of the biggest risks for any restaurant is that people won’t come, or you won’t get any good reviews, or you simply don’t execute. If you price your food too high, you might not have any customers; if you price your food too low, you’ll never turn a profit. And if your restaurant is simply not on-point or on-trend, it might take months to chart a new direction. In the meantime, you’ll still be paying interest on your loans, along with all the day-to-day expenses involved in keeping a restaurant’s doors open.
What Are Some Ways I Can Improve My Credit to Get a Better Interest Rate on My New Restaurant Loan?
Your credit score might be more important than you think if you’re opening a restaurant business for the first time. While long-time restaurateurs might be able to rely on the strength of their past restaurant businesses to get easy access to capital, as a startup business, that asset is nonexistent. Lenders that will consider financing you will have to rely on your personal credit, as it demonstrates your willingness and ability to handle your personal debt. Bad credit or fair credit scores are likely to hold you back in the loan application process. Thus, improving your credit score should be a priority for nearly all financing situations.
If you want to improve your credit score, you’ve got to understand its components. A FICO score, which is one of the most commonly used credit scores, has five components, each with its own weighting:
- Payment History: 35%
- Amounts Owed: 30%
- Length of Credit History: 15%
- New Credit: 10%
- Credit Mix: 10%
Time is an asset when it comes to good credit scores. The length of your credit history alone comprises 15 percent of your entire score. For an even bigger punch, make on-time payments throughout your entire life, as your payment history counts for more than one-third of your entire score.
The most significant move you can make to boost your score over the short term is to pay down your debt. The amount you owe counts for nearly one-third of your FICO score, and it’s one of the only factors you can change rapidly.
If you’ve got a chunk of money saved up to invest in your restaurant, consider whether you’d be better off using at least some of that money towards paying down your outstanding debt. You can use a credit score simulator to see how much of a jump your score might take under that scenario. You might be able to find this type of service for free on the website of your credit card issuer. If your score would go up to the point that you could lower the interest rates on your restaurant loans, it might be a wise course of action. If you have a tax or financial advisor, run this idea past them to get their input as well.