Assuming you’ve made all the important decisions that come before deciding how you intend to fund your new restaurant venture, now it’s time to decide whether you want to fund your dream restaurant using debt or equity financing.
It may be more commonplace to follow the route to raising capital via taking on debt- however, taking a longer view of history- the equity route is a bit closer to the norm.
Equity financing means raising capital by selling shares of the business. That essentially means sharing ownership with one or more investors. Historically, you could think of this as being like opening a lemon-aid stand, where one child says to another, ‘I can’t do this by myself, if you help me, I’ll share the profits with you 50/50.’ In equity financing, this example may be a bit simplistic, but it is essentially about sharing ownership.
Debt financing is probably somewhat more familiar and entails taking a loan and repaying it with interest over time.
Equity Financing Pros & Cons
The biggest advantage of the equity model is that the funding you obtain will be committed to your project. Your investors will only see profits if your business is successful because they have- as we say- a vested interest in the company. That means, not only can you count on their funds to build your business- but you may also receive their help.
This could also mean relinquishing some creative control over your business to your investors- since they are also part owners. For this reason, we tend to go to friends, family, and trusted partners for this type of financing. That way, they will be more likely to co-operate with you rather that wield their control in a way that places you at odds with them.
Another major advantage to this type of financing is that you do not pay interest. Rather than taking interest on the loan, your investors receive part ownership in the enterprise.
Debt Financing Pros & Cons
Debt financing is more expensive and places more responsibility on your shoulders. This is because you will be paying interest on the loan, and you have the responsibility of being the sole decision maker.
Because your lender has no stake in your business, they will expect to be paid back whether you are successful or not. This gives you greater freedom and creative control at the cost of greater expense and responsibility.
Which is Better for You?
Debt financing can be harder to obtain if you do not have a great credit rating- but the same is true of equity financing in some cases. However, even if you have bad credit- the type of investor to enter into an equity agreement with you may be more optimistic about your abilities.
Naturally, there are advantages and disadvantages to each. The type of financing you choose will largely depend on what assets you have available to you now. If you have good credit and reason to be confident in the success of your venture, debt may be a good way to finance your new restaurant business. If on the other hand, you have a supply of “Angel Investors,” generally family members or people close to you who can afford to buy a share of the business- cutting them in via equity financing can be a good way to go.
Of course, the final decision depends on your business goals and personal preference. It’s best to seek professional advice from specialist brokers in the industry. These financing professionals can provide you with the best options available.