Financing Your Self-Pour Establishment
A bank loan, finding investors or self-financing – which one is right for you?
First and foremost, you should make the decision on how you’re going to raise the amount of capital needed, whether it be through a bank loan (SBA), investors or if you are able to self-finance your self-pour adventure. In most cases, we have seen financing come from a combination of two or even all three of these options.
The first step is to conduct initial research on what the total project costs are going to be. Start with the rent or build-out, furniture and equipment (this will include your self-pour beverage wall), as well as permits and liquor licenses, which can become costly depending on the state where your business is located.
The SBA recommends separating these expenses between one-time expenses and monthly expenses. After determining what falls into each category, total the amounts for at least one year of operation, although the SBA recommends five years. These calculations will give you a good idea of the amount you need to gather in order to get started.
After completing this basic math, the next step on your journey to opening up your own self-pour business is raising capital.
As stated above, there are 3 main ways to find financing — bank loans, investors or self-financing.
Now, let’s take a look at each in more detail:
What Are They?
By Merriam-Webster’s definition, a loan is money given to the borrower for temporary use with an expectation that interest will be included in the repayment. Loans are a very common way to gain initial funds for your new business.
The Small Business Administration is a government agency working to protect the interests of small businesses and their owners throughout the country. The SBA has a network of various lenders and banks that help small businesses obtain funds while also protecting the lenders and ensuring they don’t acquire too much risk. Here, we will take a look at the three main loans that the SBA offers:
Standard 7(a) Loans: These are the most common loans that the SBA has because they can be utilized for various purposes. Designed to help small business owners with expenses involving real estate, working capital or equipment, 7(a) loans must be paid back within 10 years and are valued anywhere from $5K to $5M. One catch, however, is that the SBA requires you to have sought out other financial resources prior to applying for this specific loan.
Microloans: These loans are used for smaller funding levels and have a maximum amount of $100,000, with the average loan being $13,000. When you receive a microloan, you must receive business training and pay it back within 6 years.
CDC/504 Loans: 504 loans are used to gain assets for expansion or modernization. They are available through Certified Development Companies (CDCs), the community-based partner, and must be used for fixed assets. Benefits of 504 loans include: 90% financing, fixed-rate interest rates, and savings resulting in improved cash flow. While there is no maximum amount for 504 loans, the SBA caps their loan amount at $5M.
SBA loans are an enticing option if you’re looking to finance your own bar, restaurant or a brewery because they have low-interest rates, the lowest down payments, and you remain in complete control. In order to be considered for an SBA loan, you will need a credit score of 680 or higher and must pay a 10-20% down payment. A strategic and realistic way to go about raising capital is by raising the down payment through investors and/or doing a round of funding with family and friends.
Even though there are several benefits, there are also some downfalls. It typically takes anywhere from 30 to 60 days to hear back from the SBA, the paperwork is quite lengthy, they may require collateral, and it can take weeks to months before processing into your bank account.
Financing Loans During COVID-19
Over the last month, our world has drastically changed, and small business owners are taking a big hit. However, due to Coronavirus, U.S. Bank has reduced the APR on U.S. personal loans to 2.99%. With a U.S. bank loan, you are able to borrow money from $1,000 to $4,999 for 48 months. NerdWallet released an article this past week that will help you find the Best Personal Loan Interest Rates in May. Just remember, when you are searching for a personal loan, it is best to look at many different lenders to compare rates.
And if you happen to be a current small business owner, there are ways to get help. Credit Karma says that some personal loan lenders are offering help – through delayed payments and waived fees.
The SBA has a Payroll Protection Program in place, created by the CARES act, that provides loan forgiveness to businesses who keep their employees on payroll for eight weeks. Also, there will be a delay in all loan payments for six months without any fees from the government or lenders.
On March 27, 2020, the President signed the Coronavirus Aid, Relief, and Economic Security Act into law. Unfortunately, on April 16, 2020, the CARES Act, with $350 billion of funding for the PPP, ran out after just two weeks.
However, on Thursday, April 24, 2020, the House passed a $484 billion relief package. The package includes $321 billion for the Payroll Protection Program to help small business owners with their loan payments and help them retain employees. As of now, there is $120 billion worth of funding left.
Although it is likely to require more funding soon, you can access the PPP borrower application here if you would like to apply for assistance.
Family and Friends
One of the most common ways our PourMyBeer partners finance their self-pour beverage walls is through investors. Most businesses that are just starting out will go through their close circle of family and friends first. However, it can be difficult to blend your personal and professional lives, so we recommend proceeding with caution. It is important to write down the terms of the loan or investment so both parties are aware of their responsibilities, otherwise things could go south quickly.
Small businesses can also find investments in the form of venture capital. Businesses with a high potential of growth have a better chance of receiving venture capital, in exchange for part ownership of the business. Venture capital can come from angel investors, VC firms, or any other financial institutions. It doesn’t always have to be monetary, but rather a form of expertise. We also recommend finding angel investors who are involved in the restaurant or food and beverage industry since they may be able to provide valuable knowledge going forward.
This form of raising capital comes from various people, whether they be friends and family, investors, or other individuals. Crowdfunding is a newer way to raise money that has gained popularity through the use of social media. There are regulations in place that determine who can invest and how much they can give in order to prevent people from putting too much of their money at risk. People who invest in crowdfunding opportunities do not expect to receive any ownership in the business, but rather little gifts, such as gift cards to your restaurant. There are three different types of crowdfunding, so it’s important you do research and pick the right option for you. The most popular crowdfunding sites are GoFundMe, Kickstarter and Indiegogo. Whichever you choose, just make sure to read the specifications detailed on each website.
If you have the initial capital and trust your own financial management skills, you can become your own investor. This option is the most appealing among bar and restaurant owners for a few reasons. One, because they have a 100% stake in the company; second, there are no loans to pay off.
If the personal financial capacity is there, bootstrapping (using personal savings) can be a great way to fund the project, but that puts all of the financial risk on you. There are also local agencies such as the Community First Fund that offer small business loans to start-ups, but these come with high-interest rates and a lien on personal real estate. However, small business loans are a great option if you want to retain control of your business and if you don’t have a high enough credit score for an SBA loan – just make sure you have a business plan, an expense sheet, and your financial projections for the next five years to have higher chances of approval. Personal loans usually don’t require you to give collateral and there are more possibilities on how you can spend the money; although, the amount of money you’ll receive will be much less than an SBA loan because personal loans are based on your finances.
Ultimately, the decision comes down to how much risk you are willing to take on and how much of your business you are willing to give away to investors. If possible, always remember to try and hold at least 51% in ownership equity so that you retain both creative and operational control of your business.
Here is a quick visual breakdown of your financing options:
Here When You Need Us
Whether you choose to go with bank loans, investors or self-financing, or if you’re a small business trying to figure out finances during COVID-19, we are here to help you. We are happy to share the experience that we have had with customers in your area. Don’t hesitate to contact us at email@example.com or (312) 416-9989.
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