Why so few options: Challenges of the restaurant franchisee to find funding for growth

Recent results within the United States food service industry point to extraordinary success; this year the industry will take in over $650 billion and employ 13.5 million people (10% of the US workforce). What often goes unnoticed is the economic engine behind this machine; the restaurant franchisee. This group makes up more than half (3,000 of the 6,000) ownership groups currently operating in the United States. So here is my question. If this group is a critical part of the industry and a leading contributor to the US economy, why are there limited options to secure capital for growth?

As a business strategy consultant serving the restaurant industry, I have had the privilege to work with a diverse group of restaurant business owners around the country and it is rare that s/he does not have an intense passion for the hospitality business and a drive for growth. Whether it is investing in a store remodel, building out a new location or recruiting the best talent to run their organizations, almost every owner is looking to grow and consequently, becoming incredibly frustrated with the commitment and alternatives provided to them by the lending community. Secured loans such as a bank and/or SBA are extremely time consuming and stressful with subpar approval rates and alternative lending options such as unsecured loans are expensive.

While there have been statements from the larger traditional lenders such as Wells Fargo that they are going to provide more options to the small business owner, I am a bit skeptical. I have advised my clients to deal with the brutal facts; embrace the current lending system and turn the existing alternatives provided in your favor. Let me show you a very relevant example with thoughts that go beyond the cost of capital and why it may be worth initiating a more aggressive unsecured loan strategy.

A five unit restaurant franchisee is looking to open a new restaurant and needs access to $500,000 in capital to build out their 6^th restaurant.

Unsecured Loan Considerations

• higher cost of capital/rates for an unsecured loan are in the 15% – 20% range
• can leverage track record of existing five units
• no personal guarantee and/or assets as collateral – a secured loan requires assets as collateral
• quick and easy approval process – a secured loan is tedious with a subpar approval rate
• use as a bridge loan as you go through secured loan process
• can capitalize on real time opportunities
• new store initiative will increase company enterprise value

While the cost to obtain $500,000 of funding will be in the range of $75,000 to $100,000, the bullet points above illustrate the positives clearly outweigh the negatives. It is unfortunate that that restaurant franchisee has to deal with the current obstacles within the lending system but with greater knowledge you can embrace the system and leverage current options.

Dave Mansbach CCP is Managing Director of Aethos Consulting Group™. With over two decades within the hospitality industry as a consultant and investor, David’s experience is diverse. A frequent lecturer on industry related issues, David has written more than 100 articles on the topics of financing strategies, executive selection, pay-for-performance, corporate governance and executive leadership. He can be reached at dmansbach@Aethoscg.com.

Aethos Consulting Group™ provides advisory services to leaders of hospitality-driven businesses. Practice areas include business strategy and implementation, senior-level executive search and compensation consulting. Additionally, Aethos™ has a financing arm that provides working capital for the restaurant industry.