Across the United States, thousands of Americans run their own restaurants. In fact, as of 2019, there were nearly 500,000 independently owned restaurants in the nation. As such, restaurant owners play a vital and integral role in the United States economy, providing jobs with a low barrier to entry for millions of Americans.
Along with the current restaurateurs, there are thousands of Americans who have expressed interest and aspirations for starting their own restaurant business someday. However, this can seem like a daunting task, since restaurants have one of the largest initial outlays (the money you have to invest upfront) and startup costs of all businesses. Renting commercial space, buying new equipment, furnishing the restaurant, purchasing silverware and cutlery, acquiring a point of sale system (POS), and even obtaining a liquor license all costs money – and oftentimes present a large barrier.
Yet, restaurants can be one of the best small businesses an individual can operate. As such, in this article, we will be discussing how much it costs to start your own restaurant and how you can acquire the financing and funding to do so.
Examining the Startup Costs Associated with a New Restaurant
For those looking for a quick answer, the startup costs for a new restaurant typically clock in anywhere from around $200,000 to $1,500,000 depending on the type of restaurant you are operating. Obviously, a mom-and-pop taco stand at the local mall is going to be significantly cheaper to get up and running and a fine dining steakhouse. As such, close, careful, and meticulous budgeting is essential before diving into starting a restaurant.
For those looking for an in-depth look at what goes into starting a restaurant cost-wise, let’s break down each of the restaurant startup costs any new small business owners will be faced with when starting their own restaurant.
Business License and Permits
Running a restaurant requires owners to hold a host of licenses, all of which cost money. In addition to city and local ordinance fees that you will need for starting the business, you will also need a food service license, liquor license, and various health and safety permits that prove your restaurant’s compliance. You can expect to pay around $100 for each permit and license you to need to acquire, depending on the state and county you live in. Thus, this is one of the smaller expenses you can expect, coming in around $300 to $1,000 typically.
Unsurprisingly, commercial space is going to be one of the most expensive aspects of operating a restaurant. If you decide to purchase the building you are operating in, you’ll need to acquire a mortgage – known as a commercial real estate loan – with a downpayment of between 15% and 35%. Obviously, the better the location, the more you are going to have to pay.
While buying has advantages, you can also lease your restaurant space via a commercial lease. While the upfront cost is significantly less than buying a commercial space, you will still be responsible for providing a security deposit – usually three to six months’ worth of the monthly rent. Plus, you will most likely have to commit to several years of occupancy, since it can be a real nightmare for landlords to have to deal with moving a restaurant out.
Pricing for commercial spaces is typically based on the surrounding area and the price per square foot in that area, so make sure to do plenty of research on multiple different areas that take into account not only the cost of the location but also the market the location is in. After all, it often makes sense to pay more in rent in order to be a better location, so don’t rely only on the rent price!
Renovations, Building Expenses, and Decor
Once you have leased or purchased a space, costs will only continue to rack up as you move in and make the space your own. Many restaurants decide to go with a unique theme to create a certain atmosphere and ambiance that will keep people returning. This means you will most likely have to paint the walls, install decorations, create the appropriate outlay for operating the restaurant, and more. You may need to even replace the floors. Maybe you want to build an outdoor patio for the restaurant to take advantage of the climate you are operating in – if that’s the case, you can expect to have to spend additional money on things like landscaping and flowers to make the area look nice.
Obviously, the more remodeling you do, the more expensive it will be. However, you can expect at least $2,500 to $7,500 in renovation expenses.
Building out the Kitchen and Buying the Equipment
Here is where restaurants really start to get expensive. Depending on the cuisine you are offering, you may need a special kitchen buildout – which can run in excess of $200,000 – in order to get started. Even if you don’t need a custom buildout, you will still need kitchen appliances and commercial equipment. Here’s a quick rundown of what you can expect to purchase in advance of your grand opening (i.e. money you will have to spend before making a single dime in revenue):
Kitchen and Cooking Equipment: Ovens, fridges, freezers, stoves, dishwashers, pots, pans, cutting boards, strainers, knives, blenders, mixers, counters, prep tables, etc.
Service and Bar Equipment: Plates, tablecloths, utensils, cocktail shakers, water glasses, wine glasses, cocktail glasses, beer mugs, etc.
Dining Room Equipment: Tables, salt and pepper shakers, chairs, high chairs, lighting (typically themed to your restaurant), etc.
This only scratches the surface – so you’ll need to carefully plan to ensure that you have everything you need come opening day. All in all, the average restaurant can expect to spend anywhere from $200,000 or more on everything you need, and this number can easily reach the millions if you are aiming to open a high-end, full-service restaurant (quick-service restaurants will naturally incur much lower upfront expenditures).
Restaurant POS System and Other Technologies
We live in a technology-enabled era in which everything is becoming automated and centralized in high-tech systems capable of processing millions of data points at any given time. The restaurant industry is no exception, and thousands of restaurants have embraced the new era.
Technology systems enable restaurants to offer gift cards, maintain rewards programs, conduct innovative and targeted marketing, and more! However, all of these systems come with expenses, usually monthly or annual fees.
The first technology your restaurant will need is a point of sale system, also known as a POS system. Restaurant POS systems allow you to do all sorts of things that help build a technology-enabled, efficient business. For example, POS systems can typically do all of the following:
- Track sales and cash flow
- Tack food inventory
- Process credit cards
- Manage servers and tables
- Track time-at-table
- Manage reservations and restaurant capacity
- Manage turnover and automate check-out processes
Other systems you will want to consider (some of which will come in your POS system depending on the provider you choose) include a kitchen display system (KDS), employee scheduling and HR system, a reservation tool, and a loyalty program software with gift card capabilities. And remember, there is also some hardware you will need to operate these systems as well, including iPads or other tablets, payment terminals, receipt printers, cash drawers, and more.
All in all, you can expect to spend around $2,000 on technology hardware and about $250 to $400 a month on licenses for the software you decide to utilize.
Marketing is one of the most important aspects of running a restaurant since repeat business in the restaurant industry is far more important than acquiring new business, especially as your restaurant ages. After all, only so many people will live within driving distance of your restaurant, and most people live in the same area for years. Developing a loyal customer base is critical.
The way to do this is through marketing. That means obtaining customers’ emails through a loyalty program and then sending out rewards, maintaining an active social media presence, updating your Google business profile, and maintaining an active presence in the local community.
Marketing costs money, and there are dozens of marketing systems to choose from. Fortunately, many POS systems come with CRM systems included. Taking advantage of these tools is critical.
Along with marketing expenses, there are also hiring expenses you have to consider as well. The restaurant industry has one of the highest turnovers possible, so you have to be prepared to be hiring and training new employees frequently.
This means you will need to be utilizing job boards (which cost money), local outreach, and more to draw employees in. Remember to consider benefits options you can offer employees, which will make you more competitive. And, don’t forget to treat your employees well to try and lower that turnover rate.
Unfortunately, hiring is expensive and costs businesses in both direct and indirect ways. The direct ways are obvious, such as hiring someone to manage your employees, paying to post on job boards, etc. However, it also impacts you indirectly, since new employees tend to provide lower-quality service at first, training employees reduces your other employees’ time and efficiency as they onboard new hires, and having to constantly worry about keeping your restaurant fully staffed can distract business owners from focusing on other important business goals and tasks. So, keep that turnover rate down!
Financing restaurants can be tricky and it is often crucial for getting a new restaurant up and running. Over the past few decades, loans have become increasingly specialized, which has made acquiring loans more complex for small businesses. However, this specialization has also led to better terms and options for small businesses, even if the process of acquiring and maintaining more than one loan can seem daunting and confusing.
This specialization can be seen in a number of ways. For example, equipment financing via a specialized equipment financing loan has become more and more common. This is great for small businesses that need kitchen equipment, which is often expensive. These loans, since they use the equipment as collateral, often have great terms, and can be extremely helpful for a new restaurant business.
You may ask, why should I take out multiple loans when I can just get one to cover everything? The answer is straightforward. Specialized loans and fine-tuned for certain jobs, meaning the rates are typically more favorable than in a blanket loan or a cash advance. Profit margins in the restaurant business can be tight particularly in the early years, and having a lower interest rate (and many times specialized loans offers drastically lower rates) can mean the difference between and thriving and struggling restaurant startup.
Making sure you understand the loan process is especially important for restaurant startups since the failure rate is high and they represent a high default risk for lenders. Indeed, there are many lenders who won’t even lend to restaurant startups, since they view them as far too risky. That said, there are many industries with much harsher loan terms, so don’t be discouraged by the fact that restaurants are considered a high-risk business category.
At Biz2Credit, we work tirelessly to match small businesses with loans, including burgeoning restaurateurs!
Planning and Executing
Running a business is all about planning and executing. This means you’ll need to start by developing a sophisticated and detailed restaurant concept and business model (i.e. a restaurant business plan). In turn, this not only will allow you to have a roadmap as you begin the early stages of opening your restaurant, but it will also allow you to obtain business financing for your restaurant so that you have enough money to get the ball rolling.
Learn About Some of Our Great Tips for Obtaining a New Restaurant Loan
Indeed, you should plan on developing a detailed schedule that identifies all the actions and tasks you will need to complete leading right up to your restaurant opening. Also, consider developing a pitch deck (thousands of templates of pitch decks can be found online!) covering exactly what your plans are and what the restaurant needs. Are you opening a small restaurant or a big restaurant? Why is your restaurant unique? Who will be your competitors in the area? What advantages will you have over your competitors? Is your cuisine offering popular in the area? What are your plans for decor and what will it cost?
Not only will a pitch deck like this help you get a business loan or even obtain investors but it will also help you clarify your own plans and whether or not your business can be successful. Anything you can do to help you clarify the plans and ideas you have not only for others but for yourself is a good thing.
Starting your own restaurant is not an easy task, but by designing and sophisticated plan with clear and actionable tasks, you can get off to the right start early. Never underestimate the importance of planning early on, as this often has the greatest impact on the future of your small business.
While the costs of starting a new restaurant vary, you can expect them to come in at around $1 million, give or take a few hundred thousand. With the proper financing and loan plan, this is a very realistic and feasible number in terms of startup costs, but, nonetheless, it requires careful consideration and planning.
It will always be true that the restaurant industry is one of the most difficult to get by in, with low-profit margins early on and many difficulties and challenges inherent in the business model (like planning the amount of food to order each week). But, using a technology-enabled and sophisticated approach – supported by a strong plan – can ensure that your business has the best chance for success possible starting out right from the gate.
As always, Biz2Credit continues to work tirelessly to provide small businesses with the information and news necessary to stay up with the latest developments in industries across the United States. So be sure to keep checking back on our site and don’t forget to utilize some of the many tools we offer for small businesses, including burgeoning restaurateurs.