Bankers approve loans to restaurant companies at a higher rate than other industries, according to a study this week by small-business lending platform Biz2Credit.
Lenders approved 51% of small business loans made to restaurants and other food and accommodation businesses, higher than any other industry covered in the survey, according to the firm. The next highest rate was for healthcare and social assistance companies, which have a 37% loan approval rate.
That might come as a surprise, given the state of the industry at the moment: Consumers are not eating out more often even as more restaurants open all the time, and rising labor costs are wreaking havoc on profitability.
But maybe it shouldn’t be so surprising. “The economy is doing well, so they are doing well,” said Rohit Arora, CEO of Biz2Credit, who oversaw the research. “The purchasing power of people has been pretty good. That has really benefited restaurants.”
He believes that a lot of trends in the industry are providing a long-term boost for restaurant companies that could give bankers more faith in making loans.
“Food ordering apps and services that have come in are generating a lot of uptick in restaurant ordering,” Arora said. “Online tools and reviews and social media like Instagram have helped restaurants to take advantage of digital platforms in a much more efficient manner.”
Social media, he said, is a low-cost form of advertising that, done correctly, can generate business—as the industry saw recently with explosive sales for Popeyes Louisiana Kitchen following just a few posts from its Twitter account.
In addition, he said, shifts from cash payments to digital ensure more payments are coming in, which can fuel alternative lending sources.
While labor costs have been a problem, Arora said, food costs have been relatively stable, so the industry’s profitability hasn’t been as serious a problem as it could have been.
The survey analyzed nearly 30,000 businesses with fewer than 250 workers and $10 million in annual revenue that have been in business for more than a year.
Restaurant companies had the highest average revenue—more than $500,000—of any industry surveyed, though the owners of such companies also tended to have lower credit scores than owners in other industries.
Restaurants are more likely to be franchised than other businesses, which may also have influenced the results.
Lenders sometimes are more willing to make a loan to a franchise business, believing that the franchisor would be willing to step in and keep the business afloat.
That said, some franchises are “not run very well,” Arora said. They might expand too quickly with pricing that is too aggressive.
But bigger brand names can afford many of the technologies restaurant companies are using to generate more sales. And they have a “better use of analytics,” Arora said. “They can tailor-make more stuff based on the preference of customers. That wasn’t there in the restaurant business three or four years back.”