(This post originally appeared on The Guardian)
They say it’s the toughest type of business to start up, and it’s no wonder why. According to some reports, 60% of new restaurants fail within their first year and nearly 80% of them close before their fifth anniversary. So who would invest in such a risky venture? Turns out, many financial firms would. In fact, more so than in any other industry.
That’s the findings from Biz2Credit, an online small business financing platform.
The company analyzed the financings of more than 30,000 businesses with fewer than 250 employees and less than $10m in annual revenues from across the US that have been in operation for more than one year and found that of all industries, the restaurant industry had the highest loan approval rate. How so? According to Rohit Arora, the company’s founder, it’s not about the banks.
“Many food businesses do not qualify for traditional bank loans,” he wrote last month in Forbes. “But they are able to get funding via non-bank lenders, who charge higher interest rates but are willing to provide funding.”
Because of these non-bank lenders, which include big names such as Kabbage, OnDeck, Square and PayPal, restaurant and accommodation businesses – which by Biz2Credit’s definition includes hotels, caterers and other food service businesses – experienced an approval rate of over 50%. The next closest industry was healthcare and social assistance firms, which only received loan approval ratings of 37%, followed by the retail, information technology and professional services industries, which all received higher than 30% loan approvals.
But before you start applying for loans to open up your dream restaurant space, a few words of caution.
For starters, even though restaurateurs receive the highest loan approvals, the study found that they don’t receive the biggest loans. The average loan given to a restaurant owner was $59,746, which trails significantly behind both tech firms ($102,029) and retailers ($73,564). That says to me that although lenders are willing risk their money more often with restaurants they’re not willing to risk more money.
Secondly, a $59,746 loan isn’t that much in the scheme of things. Clearly these loans are being given out to either very small eateries or mostly just for working capital purposes (firms such as Square and PayPal, for example, lend money based on known cash flow). That doesn’t give me a whole lot of confidence that a lender – even a non-bank firm – is going to seriously get behind a grand new venture. More partners with capital will be needed if that’s your plans.
Finally, running a restaurant is really, really hard. Besides knowing how to cook and being willing to put in long hours you need to be familiar with setting budgets, negotiating food costs, hiring and firing employees, finding the right location, investing in the right technologies and managing your inventory, among many other critical things. Getting a $50,ooo loan to help is just a very small step in what will be a long, hard journey.
It’s good news that restaurateurs are leading the way in loan approvals, and I hope this motivates entrepreneurs to give it a try. But if you’re one of those entrepreneurs I also hope you’re doing so with your eyes wide open.