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What’s the Risk of Opening a Restaurant? Restaurateurs Weigh In

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If you’re a whiz in the kitchen who’s been complimented thousands of times about your cooking, you’ve probably toyed around with the idea of opening a restaurant. You think, “I can cook, my food is delicious, so a restaurant would be a no-brainer.” But what’s the risk of opening a restaurant?

You conduct research only to find out that the restaurant business is notorious for failure. Some statistics put the food service business failure rates as high as 60% within the first year.

If you look deeper into the numbers, you’ll find there are a more promising statistics around the restaurant business. The U.S. Bureau of Labor Statistics (BLS) puts the number of failed restaurants at closer to 17% within the first year.

This rate is actually lower than the 19% failure rate for other service-based businesses. According to the same study, the median lifespan of a food service business is 4.5 years, slightly longer than other service-based businesses, which last about 4.25 years.

What’s the risk of opening a restaurant? 

Consider these statistics:

  • According to the National Restaurant Association, the number of restaurant jobs in the U.S. increased 25% from 2010 to 2017.

  • Restaurant middle-class job growth was almost four times stronger than the entire economy from 2010-2015.

  • The BLS also reported that, in 2014, the average American household spent $2,787 on restaurant meals and takeout, compared to $3,971 on groceries.

Bottom line: the food service is a strong, growing sector of the economy, and many restaurateurs have mastered the art of creating, running, and growing food-service operations.

Though no business is without risk, it’s helpful to know what challenges you’re up against and how to handle those challenges to stay afloat longer. While the risk of opening a restaurant may be high, understanding common challenges and create appropriate fail safes, you could increase your chance of having a successful restaurant.

The risk of no access to capital

Any business short on capital is doomed for failure. This is especially so with restaurants. This cash-intensive business requires enough liquidity to cover employee paychecks, supplies, and other operating costs. In fact, cash is one of the biggest risks of opening a restaurant.

Generally, the pool of traditional institutions that lend to restaurants is slim. Even though the statistics show that restaurants are no more inclined to failure than other service-based businesses, banks still tend to stay away.

There’s usually no other way to finance restaurant capital needs outside of venture capital, business profits, or credit cards. In some instances, restaurants can get alternative types of financing like equipment loans, working capital loans, food truck financing, and lines of credit, but this doesn’t mean these options are always available.

Keith Zust, co-owner of Nashville-based restaurant Sea Salt, says food service entrepreneurs should “have a realistic and accurate business plan.”

He goes on to emphasize the need for sufficient resources: “Restaurant owners should have enough capital for the unexpected to weather the first year. The most common issue is not enough capital to withstand the chaos of the unknown.”

Risk management move

This risk of opening a restaurant can be mitigated by creating a cash-crunch contingency plan. Have sufficient cash reserves in place in cases of emergency. Work with lending partners before you need them to increase your chances of getting help. Keep good accounting records and be ready to present them for loans or credit applications.

The risk of high costs

The amount of money it takes to start a food service business can be daunting: leasehold improvements, food, payroll, waste, insurance, and the list goes on. If costs are not controlled, then cash resources can be a serious risk of opening a restaurant.

  • Ancillary costs (think utilities, marketing, rent, etc.)

Portland has one of the “hottest” food markets in the U.S. but has recently been hit with minimum wage hikes and rising real-estate prices. Though it’s a food lover’s town and foodie tourist destination, Portland is getting difficult for the foodservice industry to operate as profitably as before.

Brandt says the creative nature of Portlanders comes through when dealing with this challenge: “Rising labor costs have caused many restaurants to adopt a counter service model.” This is where customers order their food at a counter, then a server brings it to their table. More often than not, the customer will also bus their own table.

According to Brandt, the counter service model lends itself to lower labor costs, which could help more businesses stay in business longer.

We can also learn another valuable lesson from Portland: The food truck and food carts have helped many people break into the food-service business with lower barriers to entry.

Risk management move

This risk of opening a restaurant can be mitigated by operating as “lean” as possible. Use discretion dealing with suppliers and choosing a location. Be creative and open to changing things like your menu, service model, or even operating hours to control costs. The restaurateurs of Portland are a great example of cost-saving creativity in a pinch.

The risk of low sales

Many restaurant owners believe their idea is unique. This is a huge risk of opening a restaurant. Because of this, they should have no problem attracting customers. Perhaps the menu is quirky and the decor is slick. The staff is super genial and attentive not to mention the great location with ample foot traffic. They’ve got systems in place to update social media accounts with awesome food pics. This restaurant is awesome!

The reality of the restaurant business is that you could do everything right and still have dismal sales. Many variables come into play for restaurant receipts. Your food sales could vary based on the time of day or year or even changed based on the food or type of food category. For example, your cafe might sell more drinks in the morning and more sandwiches in the afternoon but  on weekdays only.

Melissa Stewart, executive director of the Greater Houston Restaurant Association (GHRA), is also in a “hot” food service market. In fact, Zagat  named Houston the top eating out city of 2013 (meaning the city’s population eats out the most often).

The GHRA sees restaurateurs fall prey to slow sales all too often. “A restaurant will open three locations and get tons of media attention in the beginning which causes an initial income spike,” Stewart says.

However, many restaurants do too much too soon. “Once the buzz dies down and the traffic is slower,” she says, “many owners end up closing their doors.”

Risk management move

Avoid this risk of opening a restaurant by researching your market thoroughly. Don’t be afraid to start small and nimble. Catering, food carts/trucks, and farmer’s markets are all good ways to test a market before going full-monty. Don’t forget to put an emphasis on marketing: hire someone to manage Yelp and Google listings and promote your business on social media.

The risk of inexperience

If you are a newbie restaurateur all of the risk factors can be magnified with inexperience. In fact, Stanford researchers who studied small businesses in Texas between 1990 and 2011 concluded that entrepreneurs who failed once in business were more likely to succeed the second time around. If some didn’t reach success on the second go round, each successive attempt at business was garnered more success.

The sobering reality is that newer business owners will make mistakes. Sometimes they’ll affect the business in inconvenient or disastrous ways. It’s a risk that is inevitable, however we know every business owner has to start somewhere.

Risk management move

Get a mentor or a more experienced partner to help run the restaurant. Running ideas by someone else and being open to feedback can help you get your feet wet in the food service business before you’re ready to take it on yourself.

Starting a restaurant, or any business, can be risky. There is considerable risk of opening a restaurant—if you’re not prepared to mitigate the common challenges.

There’s no guarantee that things will work out. But these risks are not unique to food service. As you can see, there are many ways you can handle those risks and be successful in food service after all.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

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4 Tips for Starting an Industrial Business

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The industrial sector is a broad category that covers businesses involved in the manufacturing, production, and distribution of goods. Small industrial companies are growing across the country and there are many opportunities for entrepreneurs to get involved in this sector.

As with any type of business, there are certain things you need to do to set yourself up for success. Here are four tips for starting an industrial business:

photo credit: Pixabay

1. Do Your Research

Market research means figuring out who your target customers are and what they want or need. There are a number of different ways to do this, but some of the most common include surveys, interviews, focus groups, and observation.

Surveys can give you a good overview of customer opinions while interviews or focus groups can help you to delve deeper into specific issues. Observing potential customers in their natural environment can also be helpful in understanding their behavior and needs.

2. Choose the Right Niche

When it comes to starting an industrial business, one of the most important decisions you’ll make is choosing the right niche. There are a number of factors to consider when making this choice, and it’s important to do your research before settling on a particular industry.

First, you’ll need to identify the needs of your potential customer base, such as the products or services they need. Once you have a good understanding of the market, you can then start to narrow down your options. Consider the competition in each niche and decide which one offers the best opportunity for success. When making your final decision, it’s essential to choose a niche that you’re passionate about.

3. Create a Business Plan

In today’s competitive marketplace, it’s more important than ever to choose the right niche for your industrial business. When you specialize in a specific industry or type of product, you can better meet the needs of your target market and stand out from the competition. How do you know what niche is right for your business? Here are a few things to consider:

First, think about your strengths. What does your company do better than anyone else? What unique skills or experience do you bring to the table? Use these strengths to narrow down your focus and choose a niche that you’re passionate about.

Next, consider your target market. Who are you trying to reach with your products or services? What needs do they have that you can address? When you choose a target market and understand their needs, you’ll be better able to choose a niche that meets their demands.

Finally, don’t be afraid to experiment. Trying new things is essential for any business, so don’t be afraid to test out different niches to see what works best for you. By keeping these tips in mind, you can be sure to choose the right niche for your industrial business.

Engineers work with industrial printer

4. Optimize Your Processes

Through industrial control engineering, you will be able to identify opportunities for improvement and design solutions that achieve the desired results. In many cases, these solutions involve the use of automation and other advanced technologies.

By optimizing industrial business processes, industrial control engineers can help to improve efficiency and increase productivity. In addition, they can also help to improve safety conditions by reducing the potential for accidents. As industries continue to grow and become more complex, the demand for qualified industrial control engineers is likely to increase.

Endnote

With an increased demand for industrial operations and manufacturing, there has never been a better time to start an industrial business. By following these four tips, you can be sure to set your business up for success.

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How to Find the Right Business Coach — and Avoid the Wrong One

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At its best, business coaching can connect you with a mentor and supporter who helps you generate ideas, make plans and execute on them.

But at its worst, a business coaching offer can cost you time, energy and money — without much to show for it.

Here’s what to expect from a business coach, how to find a coach that suits you and how to spot red flags.

What a business coach can do

Business coaches draw on their professional experience to help you set and achieve your own business goals.

“I’m here to help you, and I’m here to raise your level of knowledge in whatever way I can,” says Gary Robinson, who chairs the Memphis, Tennessee, chapter of SCORE. SCORE offers free business mentoring for entrepreneurs nationwide.

Some ways a business coach or mentor might do this include:

  • Offering feedback on your ideas and suggesting new ones.

  • Giving you templates and other tools that help you make plans.

  • Connecting you with resources in your region or your industry.

  • Giving you deadlines and holding you accountable to them.

Some business coaches may also offer coursework or group training sessions on particular topics, like sales.

Working with a coach should help you identify opportunities you hadn’t seen before or develop new strategies for pursuing those opportunities, says Sophia Sunwoo, who coaches women and nonbinary entrepreneurs through Ascent Strategy, her New York City-based firm.

“[Coaches] don’t necessarily have to have all the answers,” Sunwoo says. “But they are the people that know how to maneuver and create a bunch of different thinking paths for their clients.”

What a business coach can’t do

A business coach isn’t the same as a consultant, whom you would hire to perform a specific task. A coach or mentor could look over your business plan, for example, but they wouldn’t write it for you.

“If you were to hire me as a consultant, you would expect me to roll up my sleeves and pitch in and work with you to get things done, and you would pay me for that,” Robinson says. Coaches, on the other hand, “try to show you how to do things so that you can do them [yourself].”

Business coaches are also not therapists, Sunwoo says. Entrepreneurship can be emotionally and mentally taxing, but it’s important that coaches refer clients to mental health professionals when necessary.

Business coaching red flags

If a business coaching opportunity “promises guaranteed income, large returns, or a ‘proven system,’ it’s likely a scam,” the Federal Trade Commission warned in a December 2020 notice.

In 2018, the FTC took legal action against My Online Business Education and Digital Altitude, which purported to help entrepreneurs start online businesses. The FTC alleged these companies charged participants more and more money to work through their programs, with few customers earning the promised returns.

In both cases, these operations paid settlements, and the FTC issued refunds to tens of thousands of their customers in 2021 and 2022.

To avoid offers like these, the FTC recommends that you:

  • Be wary of anyone who tries to upsell you right away or pressures you to make a quick decision.

  • Search for reviews of the person or organization online.

  • Research your coach’s background to see if they’ve accomplished as much as they say.

Sunwoo says to also be skeptical of one-size-fits-all solutions. A coach should customize their advice to your personality and skill set, not ask you to conform to theirs.

“The moment that a business coach pushes you to do something that is really not compatible with your personality or your beliefs or values,” Sunwoo says, “that’s a huge problem.”

How to find the right coach — maybe for free

Here’s how to find a coach that will be as helpful as possible.

Determine whether you need advice or to hire someone. A coach isn’t the right fit for every business owner. If you need hands-on help organizing your business finances, for instance, you may need a bookkeeping service or accountant. And take legal questions to an attorney.

Seek out the right expertise. A good coach should be aware of what they don’t know. If they’re not a good fit for your needs — whether that’s expertise in a particular industry or a specialized skill set, like marketing — they might be able to refer you to someone who’s a better fit.

Consider free options. There may be some in your city or region:

  • SCORE offers free in-person and virtual mentoring in all 50 states, plus Guam, Puerto Rico and other U.S. territories.

  • See if your city has a Small Business Development Center, Veterans Business Outreach Center or a Women’s Business Center. All are funded by the U.S. Small Business Administration and offer free training and advising for entrepreneurs.

  • Do an online search for city- or state-specific programs. Philadelphia, for example, offers a business coaching program designed for entrepreneurs who want to qualify for particular business loan programs. Business incubators often offer courses or coaching.

Make sure your coach is invested in you. They should take the time to learn about you, your business and its unique needs, then leverage their own experiences and creativity to help you.

“I’m on your team now,” Robinson says of his clients. “Let’s do this together and make this a success.”

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Are There SBA Loans for the Self-Employed?

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Many of the same SBA loans are available to both self-employed people and more formally structured businesses, such as limited liability companies and corporations. However, self-employed individuals, like sole proprietors and independent contractors, might face a higher barrier to entry for having limited credit history, inconsistent revenue or no collateral. If they can’t qualify for an SBA loan, other business financing options are available.

Who qualifies as self-employed?

Sole proprietors, independent contractors and partnerships all fall under the self-employed category. In these cases, there is no legal distinction between the business owner and the business itself. Sole proprietors, for example, are solely responsible for their business’s gains and losses, while LLCs and corporations are legally distinct from their owners. This distinction helps protect the owners’ personal assets if their business runs into legal or financial issues.

Are self-employed SBA loans hard to get?

While a sole proprietorship is much easier to set up than an LLC or corporation, lenders may be more hesitant to finance them for a few reasons:

  • Self-employed business owners are legally responsible, as individuals, for any debt and liabilities that their businesses take on. If someone sues their business, for instance, their personal assets — not just their business — could be at stake. This makes it riskier for lenders to finance them.

  • Sole proprietorships and independent contracting businesses may have lower revenue or less collateral to offer since they’re often a business of one. This could make it more difficult for them to prove that they can pay back the loan, plus interest. And it may require more paperwork.

  • Some banks set lending minimums that surpass what a self-employed business owner is looking for, either because the business owner doesn’t need that much funding or doesn’t qualify for it.

  • Since there is no legal distinction between the self-employed business owner and their business, they may lack business credit history. To establish business credit, you’ll want to register the business, obtain an employer identification number and open a separate business bank account and credit card to keep your business and personal finances separate.

SBA loans for the self-employed

SBA microloan: Best for small loans and more lenient requirements

Applying for an SBA microloan is a great option for self-employed business owners, especially if they’ve been turned down by traditional banks and don’t need more than $50,000 in funding. In fact, the average SBA microloan is around $13,000, according to the SBA. SBA microloans are administered by nonprofit, community-based organizations that can also help train applicants in business practices and management. And because the loans are small, the application process may be easier — applicants may have limited credit history and typically don’t need as high of a credit score as they do for an SBA 7(a) loan.

SBA 7(a) small loan: May not require collateral

Funds from the SBA’s most popular 7(a) lending program can be used for a variety of business-related purposes, such as working capital or purchasing equipment. While the maximum SBA 7(a) loan amount is $5 million, SBA 7(a) small loan amounts don’t exceed $350,000. And if the 7(a) small loan is for $25,000 or less, the SBA doesn’t require lenders to take collateral.

SBA Express loan: Best for quicker application process

SBA Express loans are a type of 7(a) loan for businesses that need quick financing and no more than $500,000. The SBA responds to these loan applications within 36 hours as opposed to the standard five to 10 days, which may speed up the process for borrowers working with non-SBA-delegated lenders. Additionally, borrowers might not have to fill out as much paperwork — the SBA only requires Form 1919. Beyond that, lenders use their own forms and procedures.

SBA loan alternatives

Online lenders

Self-employed business owners turned down for SBA or traditional bank loans may be able to qualify for financing with an online lender. These lenders offer options such as term loans and lines of credit, and they often process applications faster and have more lenient requirements. However, applicants should expect to pay significantly more in interest than they would with an SBA loan.

Business credit cards

Not only can business credit cards help build your business credit history and pay for everyday business purchases, but they can also help finance larger purchases (within your approved credit limit). And if you qualify for a credit card with a 0% introductory APR offer, you’ll have multiple months to pay off the balance interest-free. Just make sure you’re able to pay off your purchase before the intro offer ends and a variable APR sets in.

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