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Restaurant Management: Financing your food business

Managing cost as a food entrepreneur can be tricky. Learn more about startup costs and ways for raising cash to finance your new food business.

When it comes to running a food business, many entrepreneurs think about the day to day operating expenses rather than start-up costs, which are the funds necessary to get the new business up and running. There are several options for financing the opening stages of a new food business, especially if you decide to start small and scale up.

Here's everything you need to know about getting financing as a food entrepreneur.

Self-Finance

Don't overlook the most accessible source of money available to you as a food entrepreneur: the money you already have. This could be personal capital stored in a savings account, money raised by selling things you own (like a house or car), or money from investment accounts. You could even start your business on a small scale by setting aside a percentage of your income from every paycheck and using those funds to buy what you need.

Self-financing is a common strategy used in the early stages of food entrepreneurship, for instance when a new business owner is recipe testing to tweak their product offering. That said, the strategy can be used well at any time. Since the money belongs to you, there are no strings attached to using it to fund your business.

Self-financing in some amount can help convince others to invest in your new business. Think of it this way: why would your friends and family, nevermind a stranger or your local bank, feel compelled to invest in your food business idea if you haven't put anything in other than sweat equity?

The main downside with self-financing your food business is that your capital is limited to the amount of money you've already saved. If you've been living within your means and haven't managed to set much of anything aside, then you can't use your own money to start your business without going into debt.

Soft Loans

So-called soft loans are loans from people you know, such as relatives or friends. People who love you will want to support your business endeavor, thus many of them may be eager to invest in your food company -- and at far more lenient terms than a bank.

Before you ask your network for loans, put together a simple business plan so your friends and family members know what their contributions will fund, when you expect to launch, and what your plans are to repay them. Treat the transaction like a business deal and maintain your professionalism throughout. After all, there's a lot more than money on the line with soft loans. Your relationships are on the line, too -- and if you can't repay your loans, you could lose friends in the process.

Raising Money From Investors

While you might think of angel investors as interested in technology startups, or located predominantly in places like Silicon Valley, the reality is that there are angel investors with diverse interests all over the world. Angel investors may themselves be entrepreneurs, which means they can provide you with helpful advice based on their business experience.

Investors usually seek equity, which is ownership stake in your business. If you want to retain sole ownership of your food company, seeking investors is not a good fit. Likewise, if you can't make a convincing case for how you would use the money, or if you don't yet have "proof of concept" (product or market data that shows why your product will be a hit), then you'll struggle to raise funds. If you have already launched your business with successful proof of concept and want to level up your food business, or if your main goal is limiting debt and you feel comfortable giving away shares, then angel investors could be the ideal solution.

If you decide to try pitching to angel investors, you'll need to find suitable individuals. Here, the EHL network can be a powerful way to find potential funders and connect with other food entrepreneurs who have gone through the process and may be able to make introductions on your behalf. Conferences and summits that offer matchmaking opportunities for investors and entrepreneurs are another good option. A third way to find angel investors is using online platforms that allow you to pitch your idea to investors worldwide. This is a good option if you have a niche product with global appeal, as opposed to a heavily local food company.

Selling Shares

You don't need to have an IPO, or initial public offering, to sell shares in your food business. You can create shares, set a price, and sell them privately. Individuals who invest in your food startup hope to gain something down the road by providing you with the funds you need to get started on your great idea. As with angel investors, this means giving up some level of control over your company in exchange for the start-up cash you need to launch your food business.

Before you can sell shares, you need to put together your company prospectus. This will make the case for your market, growth, and profitability. Your marketing and business plans also demonstrate your seriousness. With these documents, potential shareholders will understand how you plan to use the money and what tangible results their investment will have. For instance, if you plan to rent space in a commercial kitchen so you can make and sell your products, then the money has a direct impact on getting your life-changing product into consumers' hands.

Bank Loan

This is a traditional way for entrepreneurs to get funding: Apply for a business loan from their local bank. Banks generally favor established businesses that have a positive reputation within the community. While the bank loan process tends to be easier for pre-existing businesses, who can point to a track record of success, there's no reason not to apply for a bank loan when you are just starting out, especially if you have good credit and solid business plans.

Bank loans are a convenient way to raise start-up costs of over $50,000. Note, however, that the bank application process can be lengthy and time-consuming. If you need a quick infusion of cash -- for example, if a critical piece of equipment broke down and you need to replace it to keep your business running -- then the long timeline will work against you. If you are flexible in your timeline, then why not put together an application and pursue other lines of financing your food business? This way, you aren't stuck waiting on a single application to make or break your new food business.

Applying for Grants

While there aren't as many grants for food businesses as there are for other industries (say, arts), grant funding is still a compelling way to obtain financing for small food ventures. The main appeal of grants lies in the fact that the money is a gift, rather than a loan, which means you don't need to pay it back.

Since grants can help you obtain up to $250,000 in start-up costs for your food business, you could hit the jackpot and get all the money you need to open your business from one winning grant application.

The downside of grants is the upfront labor: applications are detailed, individualized, and thorough. You will spend a lot of time preparing your application for each grant you apply for, and there is no guarantee of winning. Grant writers can help you through the process by writing a compelling grant that may get you through initial rounds, but that represents an expense, which may be upfront or as a percentage of the grant awarded. Never rely on grants alone as a way to get food business financing due to the uncertainty of receiving grant funding.

Crowdfunding

Crowdfunding has exploded in recent years, thanks to readily available platforms that make it easy to create and share a campaign. In a crowdfunding campaign, you put together a campaign webpage and video that explains the appeal of your project, offer gifts in exchange for contribution, and distribute your campaign link to your network. With luck, your campaign could go viral!

Food entrepreneurs can crowdfund as a standalone option or together with other ways of obtaining financing. Crowdfunding generally works well for $25,000 or less for food products, although restaurants may be able to use the strategy to obtain six figures of financing.

With so many options to finance your food business, there's something for everyone at every stage of becoming a food entrepreneur. Pick and choose among these options to determine the best way (or ways) to get your present need funded, then revisit these options next time you need to raise startup costs or scale up your food company.

As these options show, moving forward with a food business means combining a love of food with business savvy.