How to Start a Catering Business and Financing Options
February 22, 2023 | Last Updated on: February 23, 2023
February 22, 2023 | Last Updated on: February 23, 2023
If you are an entrepreneur and love food, you might have considered starting a catering business. Indeed, there is a lot of money to be made from a catering business when run properly. Catering businesses usually have large order values. Moreover, you can cook the food for an order ahead of time to avoid some of the stress of restaurants needing to cook food quickly, for example.
As you think of ideas for your startup catering company, you might be interested in how to make sure that your business will be successful. You might want to know how to make sure that your food tastes good, that your company is competitive, and that you will be able to reach a large market. You might also be concerned about the funding options for your business and how to set up your commercial kitchen to comply with existing regulations.
Simply, you have come to the right place. In this post, we will review all of the steps you need to know as a future small business owner when setting up your catering business and the financing options to help you along the way. This step-by-step guide will be perfect for referencing as you get your catering business off the ground. We’ll cover the following topics in-depth in this article:
Before you get into designing your catering business, it might help to contextualize what a catering business exactly is and the potential avenues you can take with your small business.
A catering business is a food service company in the catering industry, preparing large orders of food usually for events or singular occasions. The company starts by receiving an order, negotiating a price for the order, cooking the order, and possibly delivering and serving the order to customers.
There are many types of events that catering businesses cater to. These include weddings, work events, family reunions, parties, sports games, events, conventions, and more. While some catering businesses cater to whoever calls for an order, others cater to a specific type of event. This can help some catering businesses specialize in the food or services that they provide.
As you get closer to building your catering business, you should consider the exact type of event that you want your catering business to serve. You do not have to limit yourself to just one, but it may be useful to consider if specialization is worth it for your catering business.
In addition to usually catering a type of event or all events, catering businesses usually serve a type of food on their menu. While a catering business could serve American cuisine, Mexican cuisine, or other types of dishes, a catering business usually has limits to its menu. This allows them to save on costs by not having to serve all kinds of food. Moreover, employees can be trained to do one type of food or a certain array of dishes very well.
Catering businesses, however, will usually serve many kinds of dishes to an event they are catering to. Such dishes will likely include appetizers, entrees, desserts, and drinks. That way, a catering business can be a one-stop shop for all the catering needs of an event. For your catering business, you might consider the dishes and drinks that you will provide.
Overall, the type of business for your catering venture will distinguish your cuisine, company, and likelihood to be a successful catering business. This is because different customers will want different things. You should try to find a great niche for your catering business.
A good first step in starting your catering business is to plan your menu. Planning your menu is a great basis to figure out what kind of niche you want your catering to have as well as starting to illustrate the costs and business model that you will need to execute.
As a prospective catering business owner, you might also enjoy planning your menu since your passion for food is the likely inspiration behind your business. If you have culinary expertise or have great food experience, planning your menu may be quite easy and enjoyable. However, if you are newer to the business, it might be a good idea to consult with a chef to help define your catering business’s menu.
As you design your menu, you should try serving your products to people who can give you feedback on your food. This can help ensure your success before you go to market. In addition, it would be better for you to conduct this testing with people who are representative of your potential customers. This might be people who are going to get married if you are serving wedding events or they might be sports teams if you are looking to feed sports teams or help cater sports events. Listening to their tastes, thoughts, concerns, and feedback on your food can help your chances of success.
As you plan your menu, there are a few important things to keep in mind. The first is cost. As you add more dishes to your menu, they are likely to have different ingredients. Having different ingredients on hand to make these dishes will increase your inventory and operating costs. This makes making a profit slightly more difficult.
In the same line of reasoning, having more dishes means needing to train your employees to be able to perfect those dishes for your catering events. This will require time to train these employees, increasing your overall operating costs. As a result, your catering business could see diminished profitability.
Moreover, you will want a relatively small amount of dishes because the people who are likely to call your catering business wanting to place an order will want to have an easy and convenient experience. If your business offers too many dishes, potential customers or planners might become too overwhelmed by your options. This could lead them to select another catering business for their business.
You will want to avoid these outcomes. While there is no magic number of how many dishes to offer, it may be smart to design a limited menu that your crew is capable of cooking and serving well so that your customers do not feel overwhelmed by the options available to them.
It is also important to offer menu options that cater to the allergies and preferences of people. Some of these might include gluten-free, vegan, or vegetarian options. Since you are serving a large group of people at once with your catering business, you will likely run into a situation where someone will have a food sensitivity, allergy, or preference. Being prepared for this and including prospective options will help you close a deal with potential customers.
Overall, planning a menu will allow you to best understand the customer demographic that you are trying to serve. This can help make the setup and planning of your business much simpler.
Once you have planned out your menu and generally understand the purpose of your catering business, it is time to start projecting the costs of the business. Your new business will have a variety of setup and ongoing costs that you will have to pay. You will need to anticipate these startup costs to determine the financing that you may need or the impact the business setup will have on your own financial situation.
Space For Your Catering Business-You will need to determine if your small business will need to buy or rent a commercial kitchen for your operations. This space will likely be the center of all food production, packaging, and then shipping to the location you need to serve the food. You will need to project out the costs for such a facility. You can look at spaces for sale or for rent in your area to project out the rough costs of space for your business. Keep in mind that the amount of space that you rent should be larger than you anticipate needing to provide you with room for growth.
Packaging Materials-Another expense that you will need to project is the packaging of the food and drink that you cater with. If you serve the food in containers, you need to determine how much the containers will cost you. If you use hot plates, you should consider how much they will cost your business and whether you will recover them after the event that you cater. You will also likely need to supply utensils and plates for your catering event. You should determine if you need to factor these into your calculation.
Equipment-Your catering business will need equipment to bake and cook the food you intend on serving. A commercial kitchen will likely necessitate having great equipment so that you can quickly produce food. When you consider the logistical challenges with catering business orders, you need to be able to cook the food just right and maintain the heat from cooking to delivery. As a result, you need to be sure that you have the right ovens, stoves, grills, and other relevant pieces of equipment. You should look into projecting these expenses into your calculation.
Delivery Methods-After you prepare the food in your kitchen, you will need to deliver it to your customers. This means being able to have the means to deliver your food. A van might be a great choice for doing this. This means that you need to purchase or lease a car or van for your food transportation. You may need to outfit the vehicle to carry all of your food without the food spilling or having other accidents happen. This can be a substantial cost that you might consider factoring into your calculations.
Wages-It will not likely be just you who is helping execute the catering business. You will likely need to hire employees. These employees will need to be paid a certain amount, and then there are other fees that you may have to pay as a result of this employment including Social Security and Medicare taxes. You need to be prepared for these costs, so projecting them out can help you ahead of time. Consider how many people you will need to assist you in the preparation and serving of the food in your catering business.
Business Insurance-Business insurance is an expense that you should likely put into your calculations. Many businesses and catering businesses will get business insurance. Generally, business insurance has coverage for property damage or liability. Property damage coverage might be a good idea in case an accident happens with your commercial kitchen or delivery van, for example. You do not want your small business to have to halt its operations over a simple accident, so it might be good to get coverage that can help you in case of this expense. Similarly, if someone gets sick from the food you served and sues you, you will want liability coverage to help protect your business and its assets.
Permit and Legal Costs-Some other costs involved in setting up your catering business include permitting and legal costs. Both of these costs will depend on the state and area that you live in. This is because the permitting will vary by local codes and the legal costs involved can be dependent on the costs set by your secretary of state, for example. While smaller, these costs are a part of your startup costs to consider.
Other Business Expenses-Businesses will also have additional expenses that may not fit neatly into any particular category. This might especially be the case with your catering business. You may not have a great estimate on just how much marketing you want to do, how much inventory you will need, or other parts of your catering business expenses. In any case, it might be wise to estimate needing some extra cash just in case so you do not end up in a financing crunch should you need any help getting your catering services off the ground.
Now that you understand your catering business purpose, its menu, and the financial projections involved in starting and running a catering business, you are ready to make a business plan. While the contents of a business plan can differ depending on who you ask, you should be prepared to include sections on a business description, a catering market analysis and strategy, a catering marketing and sales plan, a management and organization description for your catering business, a products and services description including an overview of your menu, a section on competitive analysis of competing catering businesses in your area, an operating plan for conducting your catering business, and some financial projections and a description of your catering business needs.
As you can see, a business plan is quite comprehensive. It will provide you with the guidance you need as you go into forming a business, getting permits, finding a location, financing your business, buying insurance, and equipment, hiring employees, establishing a marketing strategy, and starting your own business.
After thoroughly establishing the structure of your business in your business plan, and understanding the costs involved in starting your catering business, it is time to form a legal structure for your business entity.
The first step to this is already likely found in your business plan. You should choose a business name to operate under. You will then need to file with this name. However, before you go to file, you should make sure that others are not using the name you want to do business with. A good place to start this search might be researching similarly-named businesses online or with your secretary of state.
Once you have your name, you need to decide on a legal structure and entity type. The simplest legal structure available to businesses is known as DBAs, or Doing Business As structures. While this can allow you to set up your business quickly, it does not protect your personal assets in the case of a lawsuit.
To avoid the problems associated with accepting personal liability for your catering business, most will decide to form either a limited liability company, limited partnership, or another type of protective legal entity. The specifics of which structure is right for you depend on many things and it may be best to spend a lot of time on this decision uniquely.
Since your catering business will be working in the food industry, there are a variety of permits that you will have to obtain. The importance of obtaining these permits is that you need to comply with government regulations, and this compliance can help ensure that you will avoid some potential lawsuits. Starting this process before you are completely set up can help avoid unnecessary costs.
Examples of permits that you might be required to have include business licenses, liquor licenses, food-handling licenses, and health permits. As you can see, there are quite a lot of potential permits that your catering business will be obligated to have. The best way that you can ensure your catering business is compliant with current regulations is to contact the local health department and the relevant state organizations to be sure that you have everything you need in the way of permitting.
Unfortunately, this is the most specific general information about permitting. This is because the regulations for catering business operations will vary by state and locality according to their relevant laws.
You will also need to maintain ongoing compliance requirements in your catering business with local regulations. Food safety inspections will likely occur from the local health department at the site of your catering business food production.
One of the most important parts of your business structure will be your kitchen. For a catering business, a kitchen represents the most central part of your operational structure. This is because all of your food production takes place here, and likely your packaging and preparation for transporting the food.
It is vital that you pick a great location for your commercial kitchen. This is because you will need to transport the food that you produce to other areas in your city, such as where corporate events take place. As a result, it might make sense to locate your kitchen in an area where you can quickly deliver your hot food to your clients.
At the same time, you will need to find an easy way to get the food to your delivery vehicle. Quick and easy access to a parking lot for this is very likely important.
Aside from the logistical aspects of selecting your commercial kitchen, you should also consider the costs that it imposes on your business. You will need to choose between whether you rent or buy a location as well as the relative cost that that will impose on your business. You have to be prepared to pay the monthly expenses of your business and maintain profitability.
Once you have your funding, you should buy or rent your kitchen location.
Setting up a catering business can be a large expense. The real estate, equipment, inventory, and other expenses involved can amount to a serious cost. You might need help to be able to launch your catering business. There is no need to worry, as there are several business financing options available to you.
One of the business funding options that might be available to your catering business is a small business loan. A small business loan is a loan that is backed by the United States Small Business Administration (SBA) and is meant for small businesses in need of funding who are struggling to find financing elsewhere. If you are having a difficult time finding a loan, SBA loans might be for you.
SBA loans usually come with low-interest rates and favorable terms. They can be used for buying real estate, inventory, equipment, or helping with working capital for your catering business. The SBA 7(a) loan program is one of the SBA’s most popular loan programs for small businesses.
If you think an SBA loan might be right for you, you can find more information on the SBA website. There, there is information about accessing loan information materials and applications.
A term loan is a different financing option available to your catering business. A term loan can help your catering business get access to capital to make a large capital purchase. Available from both banks and alternative lenders (like Biz2Credit!), term loans are usually a fixed-interest rate loan best for short-term investments.
Banks typically offer lower interest rates but require long application processes. Banks will typically ask for documents like your financial statements and require you to have a good credit score and a detailed plan for the money. Banks conduct a lot of due diligence on who they lend to, so it is easier to get rejected on your application.
If you are hoping to get the funding quicker and easier, an alternative lender might be able to help. The process for acquiring a term loan from an alternative lender is shorter and they usually require less stringent qualifications for your small business. As a result, to compensate for the easier process and increased risk of default with less due diligence, these lenders usually charge a slightly higher interest rate. However, they might still make sense for your catering business.
While an SBA loan and term loan can offer great loan options for bigger catering business expenses, a business line of credit might be more useful to your unique catering business situation. A line of credit is a different kind of loan that functions kind of like a credit card. A lender will guarantee a borrower a credit amount from which they can draw down on. The borrower pays interest on the amount that they borrow.
Lines of credit can help with unexpected short-term expenses like a need to buy more inventory than usual. This can help to cover catering orders that you did not expect but would be highly profitable to take.
A line of credit can be available from both banks and alternative lenders. They usually have variable interest rates.
Equipment financing is another relevant financing option for your catering business. As it sounds, equipment financing is used when a catering business wants to buy a piece of equipment, such as a grill. Since a grill can serve as collateral in a loan and it has a high value, a loan to purchase a grill for the catering business can carry a low-interest rate. This makes financing the equipment for your catering business through equipment financing very affordable.
Once you have your funding, it is time to buy business insurance. Business insurance is a smart way to give liability insurance to your operations. Without it, you can be directly exposed to lawsuits, likely imposing greater costs on your catering business down the line. Moreover, you will want to be protected from accidental property damage so you can replace your equipment and continue running your business.
As you now have your financing in line, you can begin purchasing relevant equipment for the kitchen that you selected. You might consider either equipment financing or buying the equipment outright as options. In any case, getting the relevant equipment will help your catering business get off the ground. The equipment that you need should be outlined in your business plan, so it should be relatively easy to find what you need.
Your catering business is coming together. Now that your location is set up, you can start hiring and training your employees before the grand opening. This can allow them to become familiar with the menu, how to package food, how to transport food, and how to serve the food that your catering business produces.
As you prepare to officially start your catering business, ensure that you have your pricing and marketing materials in line. You might start social media accounts for your catering business or harness other channels of communication to let your local community and customers know that you are open and ready to operate!
As with any business, the key to getting off on the right foot is to do your research and stay diligent. It’s not enough to just have an idea. Instead, you need to invest time into actually outlining the details and your short-term and long-term approach. Analyze and research your intended market, understand what consumers are looking for, determine whether there is demand for your services and business offerings, and get into the weeds on what will enable your business to capture customers. Outline your operational plans and figure out how you are going to run the business. All of this and more is critical. The more work you do now upfront, the fewer headaches you will have down the road, and the more likely it is that you will succeed. Plus, by doing your research now, you can figure out if your idea actually has a chance and make adjustments so that it does. There’s nothing worse than seeing a quality business fail that could have been successful if, for example, it had decided to locate itself in a slightly different market.
All-in-all that is it! We’ve outlined the key steps above, so now is the time to begin expanding your knowledge and researching with our guide as a jumping-off point. With the right approach, in no time at all, you can enjoy being a small business owner with your own catering business. Remember to continue to be compliant in your business, maintain a good menu, and build customer relationships for continued success.
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