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Government Restaurant Loans Are Now Less Risky

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By Robin Enos on May 23, 2011 9:47 AM

You always heard restaurants carried a really high risk of failure, right? So why would restaurant loans have such a low default rate? Why would government guaranteed loans to restaurants look so safe to risk-averse banks?

In the past decade, 34,138 government guaranteed loans have gone to full-service restaurants. More than any other industry. The limited-service restaurant industry--drive-ins, take-outs and fast-food--came in second, reports The Wall Street Journal.

The borrowed bucks run big, too. Full-service restaurants borrowed $8.15 billion. Limited-serve restaurants borrowed $5.03 billion. Only the hotel sector borrowed more, according to the National Association of Government-Guaranteed Lenders (NAGGL).

The common perception that restaurants are very risky bases itself on facts. Restaurants carry huge overhead--about two-thirds of each dollar in sales goes to food, beverages and labor, according to National Restaurant Association figures, reports the Journal.

With all the risk, people often have romantic ideas about opening a restaurant. And lots of "how-to" opinions and how-to material is available, reports Inc. magazine.

But only 4.4% of full-service restaurant loans were charged off, or written off after SBA collection and collateral recovery. With limited-serve restaurants, 6.3% of loans get charged off. By comparison, women's clothing stores, nail salons and shellfishing operations all carry at least twice those charge-off risks.

Most of these loans will require collateral. In a restaurant, most probably that will include the restaurant equipment, furniture and fittings. These pledges are called secured transactions, and most lenders will require pledging the equipment to secure the loan.

Some common elements to all the advice: get experience in the industry, raise lots of capital, pick a good location, and work 18 hours a day, reports the Journal.

Budding restaurateurs out there, if you want to take out a restaurant loan, and can access a government guaranteed loan, you might just face less risk, and less resistance, than you thought.

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