One of the things in which we specialise here at Boost Capital is financing the businesses that many conventional lenders are loath to work with and deem too ‘risky.’ And one industry that tends to make the banks particularly jumpy is hospitality – and restaurants, specifically.
There’s no denying that the restaurant business is a tough one. The insolvency practitioners’ body R3 estimates that 39 per cent of restaurants are more likely to fail than a typical business. In comparison, just one in four of all UK firms has a higher than normal risk of failure. Restaurants also carry sizeable up-front costs in terms of food, drink and wages, plus overheads such as rent and ever-rising utility bills. Add to this high levels of competition among places to eat in many locations, and one wonders that entrepreneurs opt to run food businesses at all.
But this doesn’t justify the typical response of the high street banks to small companies in the restaurant sector that have looked to borrow in recent times. All too often, they’ve been told flatly that restaurants are a no-go area for conventional small business loans. The irony being that, beyond being stymied by a lack of growth finance, many restaurants are healthy businesses whose services are very much in demand.
Where’s our evidence for this? Well, about 19 million people eat out at least once a week in the UK, an increase of 2 million regular diners since 2012, according to consultancy Allegra Strategies. And we’ve seen other research from R3 showing that while some hospitality firms are showing signs of distress, indications are that this may be due to them struggling with the pressures of expansion. Based on our conversations with business owners in this sector, we think that there may be something in this. A lot of SMEs in hospitality are doing well, want to grow, but find that they can’t get the help to do so. There’s a school of thought that says it isn’t the case that restaurants are more likely to fail simply because of the nature of the restaurant business, but they have a greater tendency to fold because they’re under-funded. Put simply, banks perceive even successful restaurants as high risk, and therefore frequently shun them – sadly, often sealing their fate.
We see restaurateurs every day whose SMEs are profitable, demonstrate good cashflow, and show the capacity and desire for expansion. R3 found that of the restaurants it surveyed that had grown between March 2012 and February this year, almost 40 per cent had increased profits, one in five had increased sales volumes, and a third had invested in new equipment. Many others have similar ambitions, but are being frustrated by a lack of sufficient capital from mainstream sources, so increasingly are looking elsewhere to fill the funding gap. Strikingly, almost half of hospitality firms sought out alternative sources of finance for expansion in 2012, according to research from accountant RSM Tenon, and that figure is likely to have increased significantly since then.
This is where Boost Capital can make a difference. We have a good track record of helping restaurant owners to realise their business goals. We understand the sector, how these types of enterprise operate, and what really demonstrates that a hospitality company is not just viable, but actively succeeding. Take Sen Nin. We’ve talked about this thriving, two-branch restaurant business on this blog before. After an injection of funds from us, Sen Nin’s boss, Naresh Kapoor, was able to refurbish his original premises in north London to bring in new customers and compete with rival eateries that had opened nearby. He explains here the battle he faced to secure funding from regular banking providers, and why Boost Capital’s help was so valuable:
The restaurant industry is very demanding, and requires long hours and determination from those working within it. Given the extremely hard work involved, a good proportion of the companies that fail do so not necessarily for financial reasons, but because the demands on the individual are so great, and can take a toll on their private lives or health. The picture is not always as clear and obvious as statistics would suggest. And the persistent myth of restaurants being risky business by definition is one that we’d like to challenge. More people want to eat out, and, as long as there are SMEs in existence that have that will and drive to feed and entertain them, then we will continue to support the hospitality sector. And what, we ask, could be more appetising than that?