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Posts Tagged ‘H.G. Parsa’

Ask CJ – Opening a Restaurant: The Bitter and the Sweet

Thursday, August 4th, 2011

“I’m interested in opening up my own restaurant and I’ve heard that it is really tough to get financing to do so.  What might be available, if anything?”

Well, you’re quite right in that it’s often more challenging to secure financing for a restaurant.  The reason, as many people know, is due in part to the perception of a high failure rate for new restaurants.  I myself have heard countless times that 9 out of 10 restaurants fail within the first year of operation.  I was about to cite that “statistic” when I decided to do a little digging to see if it was still valid.  Boy am I glad I did!  A professor from Ohio State University’s hospitality program, H.G. Parsa, had trouble believing those statistics (and couldn’t find a source for the data) so he decided to research the failure rate himself. 

Seacoast Business Services Specialist Christine Davis

Parsa used records from the health department to track 2,500 restaurants in the Columbus, Ohio area over a three year period.  He found that about one in four restaurants close or change ownership within the first year of business.  Over three years, that number rises to three in five (Bloomberg Businessweek, April 16, 2007).  The success rate for chain restaurants isn’t much higher.  New businesses in general face similar failure rates.  It is also worth noting that the failure rate was higher when located in an area with a high concentration of restaurants.

The good news is that you have a better chance at success than commonly perceived.  The not-so-good news is that securing financing for your restaurant is still going to be a challenge.  I spoke with Carol Estes from Optima Bank in Portsmouth to see what she recommends for an aspiring restaurateur.  Carol noted that like any business seeking funding, you will have a better chance of getting funded if you have good credit, collateral, a fall back position (cash in the bank) and 10-15 years of experience in the industry.  Previous successful restaurant ownership will also build your case for financing.

Carol pointed out the SBA’s 504 loan program that provides a fixed rate commercial loan for businesses acquiring property.  If you are planning on buying the building, this might be a good option for you.  The program offers a fixed rate for 20 years for real estate and a 10 year fixed rate for equipment. The customer can purchase the property with as little as 10% down with the bank taking 50% of the loan and the SBA covering the other 40%.  A start-up business would require 15% equity.  The banks like this program as they are able to mitigate their risk while still taking care of their customer’s needs.  Funds can be used to purchase land or purchase or construct a building as well as renovate an existing structure.

I also spoke with Fred Palazzolo of the Granite State Development Corporation, www.granitestatedev.com, in Portsmouth about the SBA’s 504 program.  The GSDC focuses solely on the SBA 504 program and Fred noted that the 20 year rate guarantee in conjunction with the low down payment can be a real help to business owners who are looking to preserve cash and have a predictable loan payment.  Fred also shared with me that a start-up is defined as a business with less than two years in existence.  Single purpose facilities would require an additional 5% equity.  Unlike some other SBA programs, the 504 is not an SBA guarantee on a bank loan but actually a loan that is separate from the bank.  To learn the specifics about this program, you can visit the SBA’s website, www.sba.gov, and click on “loan and grants” under the navigation bar. 

Securing financing for a restaurant is going to be as challenging if not more so than for other types of businesses.  However, if you have the experience, credit and the necessary collateral you have a much better chance of getting the financing you need.  My hat goes off to those who are willing and able to open and maintain a restaurant.  As much as I love to eat, I could never take on that endeavor based on family obligations alone.  Restaurant ownership demands an immense investment of time and energy in addition to the knowledge and funds that are required. 

Christine J. Davis works for the NH Division of Economic Development as a resource specialist serving businesses in Rockingham and Strafford counties. Her role is to provide the support needed for businesses so that they may remain viable and growing entities in the community. Ms. Davis lives in Exeter with her two daughters.  When not performing her work or parenting duties, she likes to spend time outdoors and discovering news places and activities in the community with her girls.  She can be reached at Christine.davis@dred.state.nh.us.