Friday, March 2, 2012

In recent years, the restaurant loan industry has faced many challenges. Before 2006, restaurants were able to receive financing 87% of the time on average. This includes businesses of all credit scores. You can assume that a fair portion of that group had scores below 550. That illustrates just how loose credit was back then. However, things have changed a lot.

Around the time of the financial crisis, banks determined that there is indeed a lot of risk when making a loan. Food service in particular carried the highest rate of default. This caused them to pull back a lot of the loans and all of the sudden and without warning a few million restaurants had no means of support. Many of them weren't struggling but were used to borrowing money in slow seasons or to finance equipment.

Catering Business Loan from sean murray on Vimeo.

Without loans for restaurants, many of these businesses turned to an alternative type of financing called Merchant Cash Advance. This product is considered factoring but it does not require existing receivables, something a restaurant wouldn't have anyway. Instead it deals with future revenues, particularly the ones transacted by credit cards and debit cards.

Restaurant financing was forever changed by merchant cash advance but that is okay. It has seemed to work well for them. Strangely, the program itself was not invented during the credit crisis but it did become more mainstream around then. The program was originally invented by a credit card processor in 1996. I bet they never thought they had invented a financial product that would revolutionize restaurant lending. It will be interesting to see how everything plays out.