Capital Flexibility and Selling Food From Home
Let’s say that you want to start a restaurant. You love to cook and you’ve always dreamed of hosting a warm, inviting, interesting space for people to eat and connect.
The one thing that everyone knows is that starting a restaurant is expensive. According to a survey of 350 restaurant owners, average restaurant startup costs are $375,500.
So conventional business guidance would have you:
Develop a written 15-20 page business plan.
Use your personal credit (and a personal guarantee) to get as large of a bank loan as possible, perhaps enabled by a SBA guarantee.
I was a Business Advisor for a Small Business Development Center of the SBA and I can confirm: this was not only our recommendation – it was also what our funding was based on. As an SBDC, our success was measured by business plans written and dollar amount of loans obtained. So you can believe there was some pressure to encourage this strategy.
But there are a few problems with this approach:
Risk. If you take a loan to grow, you may be able to get started faster. But if something happens that you’re not expecting and you’re not able to pay back the loan, you may find yourself with nothing. Loans create the pressure of achieving success on a certain timeline (rather than in its own time) which is not
Rigidity. Loans can lock you into a particular way of doing things rather than giving you flexibility to change as you go. Everything is based on that initial business plan and your funding will likely be dependent on it. Meaning that if you “pivot” as so many business owners need to, you may be violating the terms of the loan.
Inaccessibility.
Many people who are or could be extraordinary business owners are not good writers or researchers. So the hurtle of creating a lengthy, academically oriented written document is likely too large of a hurtle to get over.
Most business loans depend on solid personal credit. Many people don’t have good personal credit, either due to financial or rental issues several years back or because they don’t have the needed legal status to obtain credit (and establish a score.)
At Briico, we have seen these downsides to the plan-and-loan approach play out over and over again. Given that, when an entrepreneur wants to start a restaurant, our usual recommendation is as follows:
Establish your vision. Develop a clear vision of the restaurant you ultimately want to create.
Start making food and selling food. Figure out how to start selling food in the next 2-3 months, using only cash startup costs available to you.
Grow sales. From there, grow revenues incrementally, only advancing to a larger level of investment when you have the cash available to do so (generated from your own sales.)
Only then, get a loan. Once the business is very well established and can cashflow a loan payment itself from profit AND can obtain a business loan itself (rather than on the owner’s credit score), get a business loan if needed.
Most people have a hard time envisioning ways to start selling food almost immediately and without startup costs that they don’t have. Of course, the specifics of your food focus, location's regulatory issues, and other details will vary. But just to give you a sense of possible options that are alternatives to getting a loan and starting a restaurant from the get-go...
Ways to make food without having your own restaurant:
Make food at home. Many people don’t realize that you can legally make and sell food at home in many states. For instance, in New York State, you can legally make breads, cakes, mixes, snacks, and other items without a commercial kitchen or any kind of inspection – just a one-page form. So people could be making and selling food within the span of just a few weeks. This is a way that anyone can get started towards the dream of owning a restaurant with zero capital.
Rent a commercial kitchen by the hour. In most states, you cook in a commercial kitchen, and produce any food you want to, legally, as long as you have the very cheap and very quick ServSafe certification. It’s really the kitchen that ends up certified, not the cook. So paying an hourly rate for a certain number of hours per month can make a lot of sense. There are websites like this one that let you find commercial kitchens already set up to rent. Or, you can have a conversation with a local restaurant about using their kitchen on off hours. Although the kitchen’s hourly cost can be burdensome, it’s helpful that it can scale up or down depending on your sales volumes – if you have more sales, you can pay for more hours at the kitchen to produce that volume of food.
Buy a food truck. A used food truck can cost $40,000-$80,000 so is substantially less expensive than funding a full restaurant. Many people find this to be a good way to produce food with a consistent location and a true legal kitchen. Of course, this option takes a lot more capital than most people have – and the cost of the food truck itself is just the beginning of the startup expenses. So I’d only recommend this as a more advanced step, later in the process.
Ways to sell food without having your own restaurant:
At farmers’ markets. Farmers markets can be a great way to build up a loyal base of local customers, as well as to try different ideas on a consistent basis.
To local restaurants or small grocery stores. Many local restaurants (or small grocery stores) are happy to pay vendors for fresh “homemade” items that they don’t have to make in-house themselves. Plus, pitching small restaurants directly is usually easy enough since the owner is often on site.
To friends and neighbors. Sometimes it makes sense to sell directly to friends or neighbors, having people preorder what you make and pick up from your home (or other location) on certain days and times.
At a pop-up. This one sometimes takes a little more finagling, but it’s often possible to negotiate a store-within-a-store setup with a local grocery store or restaurant. You can consider a pop-up (on off hours) concept or a “stand” within the store that operates simultaneously with the larger store.
On a Food Truck. Regardless of whether you make the food in the food truck or not, you can sell from a food truck. Laws on food trucks vary a lot by state, county, and municipality, but it may be an option (even with tables out front.)
Many times, entrepreneurs think what they need to move forward is a loan. Given the riskiness, rigidity, and inaccessibility of loans, we often recommend finding a way to grow your business with sales, rather than with debt. It usually means finding a slightly different path towards your ultimate vision, taking it a bit more slowly, and prioritizing your sales growth above all. We call this a capital-flexible approach. And it’s one we’ve seen work again and again – just at a slightly slower pace than the debt dependent approach.