How One Restaurant Owner Found Business Financing

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How One Restaurant Owner Found Business Financing

Kevin Onyona was driven both by a love for cooking and dissatisfaction with the restaurant scene in Beltsville, Md. His restaurant, Swahili Village, launched as the area’s only source of authentic Kenyan cuisine.

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I started Swahili Village seven years ago. I was frustrated trying to find good African cuisine,” Onyona said. “In 2009, I bought a lease from a gentleman who was struggling…We did some renovations, cleaned up the kitchen [and] got a liquor license.

Opening the restaurant was a relatively inexpensive endeavor for the industry, coming in around $150,000. Still, coming up with the money involved a few challenges.

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We borrowed from different people, different companies that were basically loan sharks,” says Onyona, who cautions aspiring restaurateurs to be wary of merchant cash advances. Getting funds quickly is tempting, but high interest rates and payments can make it difficult for a business to succeed. Business owners who don’t read the details, he says, can easily get in over their head.

Fortunately for Swahili Village, Onyona navigated the restaurant’s early years successfully. “Like most places do, we struggled the first three years and then stabilized financially,” he said. “America is ready for an authentic African restaurant. We are growing an American clientele very well.”

In the last year, Onyona decided it was time to expand, so he chose a site near his original restaurant to keep his established customer base. Moving to the new location was intensive work, and expensive, coming in at $700,000.

This time around, Onyona had experience on his side when it came to seeking financing.

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I managed to take advantage of [owning] a solid business that had been open seven years,” he said. “I was able to get lines of credit and a small SBA loan.” He highly recommends that restaurant owners explore applying for an SBA loan. “SBA loans are the best financing option that any business could want. They’re more forgiving and interest rates are more affordable.

To Onyona, the cost of a loan was worth it for the freedom to customize the space.

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We built it from scratch,” Onyona said. “It used to be a grocery store…I had to build an entirely new restaurant, new kitchen, new bar. It was a complete buildout from the ground up. Parking is abundant, and there are a lot of options to do a large party. We have so much to play with.

Expert Q&A

Katie Taylor

Restaurants are a high-risk industry. Several studies put the failure rate at about 60 percent within three to five years. The perishability of food also means thousands of dollars in investments may literally get thrown away if a business doesn’t thrive.

Main Street Launch, formerly OBDC Small Business Finance, provides capital for new small businesses in the Oakland and San Francisco, Calif. areas and to veteran-owned businesses in California. Katie Taylor, assistant vice president of communications, spoke with MoneyGeek about the unique challenges facing aspiring restaurateurs.

What special challenges do restaurants face when it comes to financing?

“Financing is really dependent on your general business plan and understanding how much things cost and how to price things. When you’re a brand new restaurant, any type of startup has a hard time getting a traditional bank loan. Crowdfunding can be really time-consuming and challenging, [and] location is a big thing, in the sense that you want to make sure your customers are going to be able to find you.

One thing with financing that folks don’t know until they’re in the mix is that they need to have some money to put in… It’s showing that you have some skin in the game.” For Main Street Launch, this “equity injection” is around 10-20 percent of the total loan amount.

How much money does a restaurant owner need to get started?

“The size of the space has a big impact on varying costs. Your rent is generally based on square footage, so a smaller space may be cheaper. If you need to do construction or purchase equipment, furniture and fixtures, the size of the space impacts that also.” One client who’s purchasing a restaurant that’s already built out has an estimated $600,000 budget to acquire the business and make some upgrades.

For would-be restaurateurs paralyzed by sticker shock, Taylor recommends a more wallet-friendly starter option. “Food trucks can generally be purchased and built out for $50,000 or less (depending on the choices made in the build-out). This is sometimes a good way to get started to build revenues before launching a brick and mortar space.”

How can a business owner demonstrate that they’re an ideal candidate for a restaurant loan?

“Having a really strong business plan. Even if it’s not fully written out, having a really strong concept of what you want to be doing, who your clients are and what you’re bringing to that community or neighborhood that isn’t there.” Having financial documents and projections prepared as fully as possible is important, too, she says.

What are the typical fees and interest rates associated with restaurant loans, and how can you make sure you’re getting a good deal?

“Bank loans typically are prime plus two, so that’s currently 5.5 percent. Prime is determined by the Fed, so it changes periodically. Read the fine print to see if there are regular fees that are incurred. We’re seeing that the difference between interest rate and APR can be really big. You could be offered a 3 percent interest rate and have a 30 percent APR because of all the costs…Ask if there is a prepayment penalty and how much it is.” Understanding the full amount you need to pay, according to Taylor, can make the difference between succeeding and getting caught in an ugly repayment cycle.

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