Are Restaurants Really Risky Businesses?

In the past decade, more government-guaranteed loans have gone to full-service restaurants than any other industry – 34,138, to be exact. The limited-service restaurant industry, including drive-in, take-out and fast-food establishments, came in second with 25,288 loans.

The dollar amounts were also impressive. Loans to full-service restaurants topped $8.15 billion, falling just shy of the $8.25 billion that the hotel sector received, according to the National Association of Government-Guaranteed Lenders, a lobbying organization that collects data on loans backed by the Small Business Administration. Limited-service restaurant loans totaled $5.03 billion.

Restaurants are commonly known for being risky ventures, so why do risk-averse banks disburse so many loans to them? After all, restaurants carry a terrific deal of overhead – roughly two-thirds of each dollar earned is allocated to food, beverages and labor, according to the National Restaurant Association. And then there’s the added expense of rent and utilities. Restaurateurs also have to comply with numerous regulations while satisfying picky and demanding customers (see our post, “How to Open a Restaurant”).

The first explanation for the high loan volumes is the sheer number of restaurants. The NRA recently reported that restaurants are the second-largest private industry in the U.S., after health care. There are nearly a million locations across the country, says Hudson Riehle, senior vice president of research and knowledge at the Washington D.C.-based organization.

“The universe is extremely large and it isn’t surprising that restaurants are near or at the top of the list regarding both the dollar amount as well as numbers of loans,” he says.

Could that mean banks are issuing lots of loans to eateries that are then defaulting?

Not necessarily. While full-service and limited-service restaurants top the list for the number and dollar-value of SBA loans, they slipped down the list when it came to loan failures.

Only 4.4% of full-service restaurant loans were charged off — or written off as a loss after the SBA collected personal guarantees and other collateral put up against them. Some 6.3% of limited-service restaurant loans were charged off. By comparison, women’s clothing stores hover at a 12% charge-off rate, nail salons at 14% and shellfishing operations at 36%, according to data from NAGGL.

Of the 1,128 industries that received SBA loans between Oct. 1, 2000 and Sept. 30, 2010, the government’s last fiscal decade, full-service restaurants placed 408th in the charge-off rank, and limited-service restaurants placed 204th.

To be sure, plenty of restaurants shutter every year. But research seems to indicate that the number of closings isn’t stratospheric. Establishments in the leisure and hospitality sector have survival rates that are on par with other industries, according to a 2005 study from the Bureau of Labor Statistics.

Combine that research with the loan-failure figures provided by NAGGL, and there’s a case to be made for restaurants: Maybe they aren’t that risky, after all.


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