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Refinancing Offers Cash Flow Benefits for Restaurant Operations

Wednesday, 29 August 2012 20:28

RestaurantThe restaurant industry has experienced significant financial setbacks in recent years due to the slumping economy and increasing transportation and commodity costs. Even solid performers in the fine dining and casual dining segments are facing difficulties according to a recent study conducted by NRN-MillerPulse. The study showed that fast food restaurants have weathered the financial storm most successfully; some franchise stores and independent fast food restaurants have actually increased their market share. However, further challenges are expected on the horizon as commodity costs seem poised to increase once more due to widespread drought and crop failure in large areas of the U.S.

The perfect storm for the restaurant industry

An unlikely combination of factors has contributed to the financial woes of the restaurant business as a whole. Increasing fuel prices have played a role in the higher costs of transporting food. These added costs may have discouraged consumer patronage as well. In addition, the recent extended drought conditions that have plagued much of the Midwest are already driving up prices and reducing the quality of available fresh produce and locally sourced fruits and vegetables. These items are staples for many fine dining establishments and are in increasingly short supply throughout the marketplace. Combined with reduced disposable income in the general economy, these factors have created a virtual perfect storm in the fine dining segment of the industry that may have left some businesses low on cash and short on options.

An appetite for funding

While this downturn in restaurant traffic and revenues is not expected to be a lasting one, it may present significant cash flow difficulties for restaurants otherwise in healthy financial shape. For these businesses, refinancing existing loans can provide much-needed capital and help to stabilize the restaurant's financial situation. Refinancing a maturing loan can provide cash directly to the borrower. Restaurant owners and managers can also choose to reduce their ongoing monthly costs by refinancing existing debt to achieve more favorable interest rates and terms. This can relieve some of the financial pressure and provide restaurants with the capital resources they need to continue serving their customers and maintaining their operating hours and food quality.

Making the case for refinancing

Restaurants are widely regarded as risky investments by traditional commercial lenders. This perception is likely due to misconceptions about the failure rate for new restaurants; some erroneous figures put that failure rate as high as 90 percent. In fact, a comprehensive study published in 2005 in Cornell Hotel and Restaurant Administration Quarterly found that just over 25 percent of all restaurants failed in the first year. This still constitutes a significant risk for lenders that typically practice a conservative financing strategy for their loan portfolios. Restaurant owners and franchise holders may wish to consider alternative financing sources in order to ensure that they get the most favorable refinancing terms possible. In particular, private investors may be more likely to assume the risks inherent in refinancing loans for restaurants and fine dining establishments. Additionally, providing well-documented and supported refinancing applications can be of vital importance in order to obtain financing to maintain operations.

CNF Exchange offers borrowers the chance to connect directly with lenders and make their case for business financing. This can provide restaurant owners and financial managers with the added edge they need to continue their operations and succeed even in difficult economic times.

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