Why Crowdfunding is a Bad Idea for Restaurant Financing

Whoever came up with the phrase “labor of love” either owned a restaurant, or would certainly feel right at home in the restaurant sector. Indeed, whether the challenge is to keep inventory and supply costs low, maintain proper staffing levels, keep demanding customers happy, or fend off and endless stream of competition, life as a restaurant owner is more of a calling than a vocation. You’re either totally immersed in it, or it’s wiser to check out now and find another career path.

Of course, you’re made of strong stuff, and as such you have every intention of ensuring that your restaurant survives, succeeds and thrives. And that means sooner or later (or perhaps right now), you’re going to need restaurant financing to cover a temporary cash flow shortfall, or cover a long-term expense that boosts your profitability and competitive advantage. And while there are some good options available to you (and I’ll highlight those in a moment), right off the bad you should cross crowdfunding off your list. Here’s why:

  1. You probably won’t get the funding you need.

Forget about the inspiring success stories you read about on the web, or hear about on TV. The overwhelming number of businesses (restaurants and others) that try to generate financing through crowdfunding fail to come even remotely close to their target. There’s simply too much competition, and trying to piece together a major cash infusion through $50 and $100 pledges at a time is usually an exercise in frustration – and futility.

  1. It’s not funding — it’s a trade.

Although it’s called “crowdfunding”, as PC World points out, it’s not actually funding because you aren’t borrowing the money. You’re making a trade, which means in the long-run your total cost of borrowing might become excessive and unsustainable.

  1. You don’t know who might be lending you money.

Having a good relationship with your lender (or lenders) is important, since issues and opportunities will come up down the road. But with crowdfunding, you can’t pick up the phone or send an email and have a meaningful conversation. The most you can do is post mass updates on your campaign page, website or through social media, which is hardly strategic.

  1. Your reputation is on the line.

With apologies to Shakespeare: hell hath no fury like a crowdfunder who believes that they’ve been scored (whether they actually have or not is beside the point, it’s all about perception). As such, if you decide to change direction – not because you’re avoiding commitments, but because you need to steer your restaurant in the right direction – then expect anyone and everyone who has even pledged $1 to become hostile, and shred your reputation online and offline. Remember: the vast majority of people who pledge money through crowdfunding aren’t experienced lenders or disciplined investors. They’re just everyday, ordinary people who might not even know how to plan their own personal finances, let alone know how to run a complex restaurant operation.

Moving Forward

If crowdfunding clearly isn’t the answer for your restaurant financing needs, then what is? Well, unless you have flawless personal and business credit, have been in business for at least two years, have ample collateral, and can afford to wait several months to get the cash, then your best move is to enter the alternative lending marketplace and explore a working capital loan, merchant cash advance, or business line of credit.

Any of these options can give you the quick funding infusion you need at a reasonable cost, so that you can continue your “labor of love” – while you boost competitive advantage, sales and profits.

Enjoy Plunged in Debt?

Pid

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Why Crowdfunding is a Bad Idea for Restaurant Financing

Whoever came up with the phrase “labor of love” either owned a restaurant, or would certainly feel right at home in the restaurant sector. Indeed, whether the challenge is to keep inventory and supply costs low, maintain proper staffing levels, keep demanding customers happy, or fend off and endless stream of competition, life as a restaurant owner is more of a calling than a vocation. You’re either totally immersed in it, or it’s wiser to check out now and find another career path.

Of course, you’re made of strong stuff, and as such you have every intention of ensuring that your restaurant survives, succeeds and thrives. And that means sooner or later (or perhaps right now), you’re going to need restaurant financing to cover a temporary cash flow shortfall, or cover a long-term expense that boosts your profitability and competitive advantage. And while there are some good options available to you (and I’ll highlight those in a moment), right off the bad you should cross crowdfunding off your list. Here’s why:

  1. You probably won’t get the funding you need.

Forget about the inspiring success stories you read about on the web, or hear about on TV. The overwhelming number of businesses (restaurants and others) that try to generate financing through crowdfunding fail to come even remotely close to their target. There’s simply too much competition, and trying to piece together a major cash infusion through $50 and $100 pledges at a time is usually an exercise in frustration – and futility.

  1. It’s not funding — it’s a trade.

Although it’s called “crowdfunding”, as PC World points out, it’s not actually funding because you aren’t borrowing the money. You’re making a trade, which means in the long-run your total cost of borrowing might become excessive and unsustainable.

  1. You don’t know who might be lending you money.

Having a good relationship with your lender (or lenders) is important, since issues and opportunities will come up down the road. But with crowdfunding, you can’t pick up the phone or send an email and have a meaningful conversation. The most you can do is post mass updates on your campaign page, website or through social media, which is hardly strategic.

  1. Your reputation is on the line.

With apologies to Shakespeare: hell hath no fury like a crowdfunder who believes that they’ve been scored (whether they actually have or not is beside the point, it’s all about perception). As such, if you decide to change direction – not because you’re avoiding commitments, but because you need to steer your restaurant in the right direction – then expect anyone and everyone who has even pledged $1 to become hostile, and shred your reputation online and offline. Remember: the vast majority of people who pledge money through crowdfunding aren’t experienced lenders or disciplined investors. They’re just everyday, ordinary people who might not even know how to plan their own personal finances, let alone know how to run a complex restaurant operation.

Moving Forward

If crowdfunding clearly isn’t the answer for your restaurant financing needs, then what is? Well, unless you have flawless personal and business credit, have been in business for at least two years, have ample collateral, and can afford to wait several months to get the cash, then your best move is to enter the alternative lending marketplace and explore a working capital loan, merchant cash advance, or business line of credit.

Any of these options can give you the quick funding infusion you need at a reasonable cost, so that you can continue your “labor of love” – while you boost competitive advantage, sales and profits.

Enjoy Plunged in Debt?

Pid

Subscribe to get our latest content by email.

Powered by ConvertKit

Speak Your Mind

*