SOURCES OF FINANCING

So, you have decided to take the plunge and open your own restaurant/ bar/ B&B/ hotel and you only have a nickel to your name. How are you going to raise the funds needed to open? Here is a look at some sources of funding to set you on your way to success.

OPM: Other Peoples Money - a great way to raise equity until things go wrong and you realize that you have just forced a foreclosure on your grandmother's house. The wise use of O.P.M. is a good thing as long as the person lending you the money can stand to loose it. If they can't and they are close family or friends you will live a lifetime regretting having borrowed the money. With a sound business plan approach your friends and relatives, they can be a great source of financing but don't rely on them for all the money you need.

Barter: In the last few years Barter has come along way and Barter companies proliferate the scene. Barter works in a manner that you can borrow barter "dollars" from the barter company and then use these "dollars" to buy goods and services from other companies on that barter exchange. It works very well if the barter company has the right mix of companies in its fold. Barter companies will lend you barter dollars which then get repaid by people using your establishment and paying in barter dollars. This is great because the barter company promotes your new business to ensure that they get their barter dollars back. The downside is that a new business needs all of its cash to pay the bills. Receiving barter dollars is negative to your real cash flow but can be viewed as no different than paying a bank loan each month (except you have very little control on the flow of the barter dollars).

Banks: Forget it! They hate R & R (restaurants and retail) lending and you will have a tough time with the banks unless you wish to guarantee the loan with assets that are worth approximately twice the value of the loan. The way to get money from a bank is to ask for a small business loan (SBL). It is guaranteed by the federal government and if you can meet the normal standards for a loan (business plan, equity funding, management experience) you stand a chance of actually getting money from a bank.

The Landlord: It is an established practice for landlords to either contribute and/or loan new tenants money. You are going to improve the asset value of the property and let the landlord share in the costs of improvement. When negotiating a lease, make this a major negotiating point. Even if you only get a loan from the landlord you are that much closer to the financing that you need.

Limited Partnerships: A limited partnership is where you would put out a prospectus that sells a limited number of shares with each share having a fairly high value to sophisticated investors. There are semi stringent rules set out in each province as to what constitutes a sophisticated investor. You can put out a prospectus to "sophisticated" investors and raise the required capital. The best place to check the rules you need to follow is by contacting your broker and they will either know the rules or will be able to direct you to someone that does. The last time I tried to put together a Limited Partnership the minimum share amount allowed was $25,000. It can be a great way to finance a restaurant if you have enough contacts that have "play" money and can spend $25,000 as though it was pocket change. When you use this type of limited partnership make sure you take a couple of shares as a finders fee and dilute the value of the return of the shares once the capital is paid back. If you are going to try this route, talk to a lawyer and accountant first, you will need good advice to make this happen!

Leasing: Leasing the right items can save you substantial capital. Normally high ticket items such as P.O.S. systems or signage is leased. The sales rep that is trying to make the sale will work hard to find you a leasing company to finance the purchases. I had a restaurant with partners once and we even leased the used equipment! The problem with leases is that it is an operational cash flow drain and can really play havoc if you are in slow times. Leasing rates are not competitive with banks and cost a lot more over time although you can right off your lease payments for tax purposes.

Be Creative: When I was building my first restaurant I needed a B.B.Q. for the outdoor kiosk but had run out of funds. As this B.B.Q. was going to sell sausages I approached the major sausage manufactures and asked them to buy the B.B.Q. for me. One of the suppliers did and we were loyal to them for 8 years for their contribution. Suppliers-manufacturers... turn over every stone to try and find creative sources of financing.

True Story: I was looking at moving to Calgary a number of years ago and spent some time looking for a restaurant to buy in Calgary. I came across a Chinese restaurant at the base of the Calgary Tower that was closed. After doing the numbers I realized that this location could be converted into a nice Southwestern Restaurant with a bar, pool tables and a 100 seat dining room. Not only was I able to raise the funds needed to make the changes, I was over financed! Using a combination of barter, tenant improvement money, equity and a marketing company from Toronto I raised the necessary funds. Unfortunately a bidding process started and the other bidder was CP Hotels. As they were part owners of the building I came in second but it was a great exercise in creative financing!