Nine out of 10 restaurants fail in their first year of trading. It’s a statistic that’s often repeated, and sends the message that no one in their right mind would think about going into the industry, or, worse still, lending to a restaurant owner.
But no one really knows where this oft-quoted fact derives from – and that’s because it has no basis in reality. Not only are restaurants far less risky than many lenders assert, the industry wouldn’t demonstrate its current growth rate if closures were as commonplace as the scaremongers would have us believe. While some food service businesses do shut up shop every year, often personal pressures have come to bear on the boss. Worse still, too frequently it’s the fault of the banking institutions that have refused these enterprises growth capital or any kind of financial life line.
Busting the restaurant failure myths
It is true the hospitality industry is tough, and faces many challenges particular to its field. Upfront costs for food, drink, and wages are considerable, and overheads, such as rent and utilities, can be punishing. Independent restaurant businesses are under increasing pressure from the growth of the big chains, studies show, while competition from local rivals can make turning a profit hard. About 39 per cent of restaurants are more likely to fail than a typical business, the insolvency practitioners group R3 has told us in the past. Compare this with one in four of UK firms overall that has a higher risk of failure. But this still falls far short of the closure rates so often cited by critics as the reasons why restaurants are, they insist, a bad business investment by their very nature.
Running a restaurant is hard work, requiring long hours from business owners. Anecdotal evidence suggests the toll this takes on individuals in terms of their physical health and personal relationships can also be significant to the decision to walk away from an enterprise. While detailed analysis of the factors involved in restaurant failures is hard to find, there are clues in figures collated about franchise resales and closures. Many franchise systems are food-led, and the British Franchise Association’s own data indicates change can be as much down to people retiring, experiencing domestic pressures, or simply running out of steam having worked for years on end, as much as commercial failure. Statistics don’t tell the whole story behind a business operation, and why it succeeds or fails. In fact, a good proportion of the restaurants shutting up shop every year may be great businesses, it’s just that the owners have lost the appetite to run them anymore.
Growing pains
Another theory behind the greater difficulties experienced by restaurant SMEs is they can show signs of distress precisely because they’re struggling with the pressures of expansion. This is also indicated by research from R3, showing many business owners express a desire to grow their business, want to invest to improve performance, and enhance its competitive edge, but even provably successful firms are turned down for capital by the banking establishment. And why are they told they’ve been rejected? Not because they run a poor operation, but because they operate in a risky industry. It’s a frustratingly circular, painful, and ultimately very destructive argument the restaurateur is always set to lose. Once investment capital is withheld, many businesses’ fate is sealed.
That those operating in the restaurant industry are ambitious is without a doubt. The growth rate for restaurants in London was recently described as “off the chart”, M&C Allegra Foodservice found, while the same report indicated the North-East of England beat even the capital in terms of openings of food-led premises. Many established businesses are increasing profits and sales volume, or investing in new equipment. And, increasingly, they’re turning to alternative forms of finance, having been frustrated by the negative attitudes of conventional lenders towards their business sector.
Putting alternatives on the table
Only a few years ago, many restaurateurs would have regarded alternative finance as a secondary option to their bank when looking to raise money. That is, if they’d heard of AltFi at all. Today, more business owners are using peer-to-peer loans, leasing arrangements, crowdfunding platforms, and short-term, unsecured lenders that operate online, such as Boost Capital, to achieve their growth plans. Many are attracted by the speed, simplicity, customer service, and willingness to lend of new providers, as I’ve explained at length in the past.
There are many success stories in this business sector, which is why we do so much work with restaurateurs. As much as a third of Boost Capital’s business can come from the hospitality sphere. We analyse total monthly gross sales and an enterprise’s ability to generate revenue as an indication of its eligibility to borrow. Many restaurants look like a good proposition based on these measures, even if cashflow fluctuates at different times of year, as trading conditions shift.
Like many of our peers in the alternative funding field, we don’t labour under outdated or inaccurate preconceptions about certain business sectors. There are many new lenders who are keen to work with restaurant owners to help them grow their premises, customer base, or even expand into further branches if their first venue is already thriving. We understand restaurants, and know they’re not risky per se. The truth is that the best of businesses can fail if it’s under-funded, and that is something we believe, with alternative funders’ help, should no longer happen.
Alex Littner is managing director of Boost Capital
