Economic cycles come and go, but in the restaurant business, one constant remains: Operators are always in need of funds for capital expenditures — maybe even more so today than ever before.
“The restaurant business is as capital intensive an industry as there is,” says Ted Lynch, managing director of the Restaurant Group at Bank of America Merrill Lynch. “I’m always amazed to hear restaurant operators say, as they look back over the previous year: ‘I can’t believe we spent that much on fixed assets.’”
But they have, and there are always reasons to spend more, ranging from non-discretionary needs like maintaining parking lots, replacing old ovens and updating point-of-sale payment terminals, to more discretionary spending for things like major remodeling projects every so many years.
Indeed, in this hyper-competitive business, differentiating your brand is no longer as simple as improving or expanding your menu, because so many restaurants have already done that. “You have to try other tactics, which can mean investing in everything from exterior facelifts to tabletop technology that allows diners to play games and place orders electronically,” Lynch says.
Recent research confirms that capital spending remains strong in the industry. For instance, on its website, the National Restaurant Association in September was reporting that 72% of restaurant operators had made a capital expenditure in the previous three months, while 66% were planning to do so in the coming six months. Meanwhile, Barnes Reports has forecasted that full-service restaurant capital spending will grow 5.7% to $2.3 billion this year.
Changes in the financing landscape
The ongoing high demand for capital has recently attracted new lenders to the restaurant space.Many banks with no history of lending to restaurants have set about establishing specialty restaurant financing practices. As a result, restaurants have more lenders from which to choose.
“These days, if you have borrowing needs of $10 million or $15 million, and you want to get a proposal from a lender, you could probably get five or six within just a couple weeks,” Lynch says.
But can these new entrants to the marketplace offer the same potential for a long-term, committed financing relationship as a longtime restaurant lender?
Find a relationship with staying power
Facing intense competition — and with the nature of the business requiring regular capital expenditures — restaurateurs need lending relationships that offer steadfast support, Lynch says. You need a lender that will be there for you in the future, in good economic times and bad, he notes.
“Today’s strong levels of capital expenditure in the restaurant industry aren’t a passing fad. In many ways it’s no different now than it was in 2008, when the financial markets were in triage. The big difference: Who was there with the resources and support of their top management to continue making restaurant loans?” he asks. “In 2008, there were only two or three of us.”
Keeping that in mind, Lynch suggests that restaurateurs look to the future and ask an important question: “When difficult economic times return, and there’s another capital markets slowdown, will my lender remain a steady source of capital?”
- Reliable access to funds for capital expenditures can help restaurant operators stay competitive.
- Capital expenditures in the restaurant industry remain strong and are expected to increase.
- Working with an experienced lender can help operators withstand economic fluctuations and capital market slowdowns.