There’s a stat out there, a widely-repeated one, that claims that 90-95% of all restaurants fail within the first year. It’s as common a cliche as when people say “you can fail seven out of ten times in baseball and be a star!” What these have in common is that they are both false. The baseball saying is a matter of misunderstanding statistics, but the restaurant myth is far more pernicious. It discourages entrepreneurship, scares away potential owners and investors, and makes it harder overall to start a business. It also neglects the important role of a hard-money loan from Socotra.
The truth is that restaurants have approximately a 59% failure rate over the first three years. That breaks down to 26% in the first year, 19% in the second, and 14% in the third, according to a not-as-widely-reported study done by Dr. HG Parsa.1 There are two takeaways from that: even this smaller number is still catastrophic, but it also gives a restaurant some chance at breathing room. With breathing room comes time to adjust, make changes, and to succeed, if you have the right plan, and the right source of loans.
Why Restaurants Fail
Even if you hadn’t seen the stats, you probably knew that the “90% in the first year” number couldn’t be correct. On just an anecdotal level, how many times have you walked past a joint and said “I never see anyone in there!” but it still sticks around for a few years? That makes sense—restaurants have investors, or at least a lot of money poured in, and people are reluctant to pull the plug.
This is often due to the “sunk-cost fallacy,” where the theory is that you have already lost X amount of dollars, so you need to stick with it to recoup that, even though you usually end up losing twice the amount. You see this in gambling and sports and war strategies all the time. People never think they are going to lose more money.
But they do, of course. There are a lot of reasons restaurants fail, including:
- Bad location
- High rent
- Poor marketing
- Disagreement among partners
- Bad timing (the lux cupcake craze juuusssst passed)
Obviously, you could also suffer due to just not being very good at cooking, but let’s assume that isn’t the case. Aside from that, the biggest reason restaurants fail is that they don’t have the capital to set things right once the plan starts to falter. Everyone imagines lines out the door on opening day, but unless you already have a big name, that isn’t going to happen. So what do you do if capital is running low and you need to right the ship?
How Cash-Out Refinance Loans Can Save Your Restaurant
So you’re six months in, and while people love your food, there aren’t enough customers to sustain it. Unfortunately, you don’t have the capital to make major changes. If your restaurant is owned free and clear, you may be eligible for a cash-out refi loan from Socotra Capital, California’s leading equity-based lender. This loan can save your restaurant. It is helpful because it isn’t based on credit history. We know you might be a little jammed. Following your dreams can do that.
A hard-money loan can act as a bridge, giving you the immediate liquidity you need to make changes. These can include:
If your food is great, but the interior is a little rough, people might walk on by. You can use this loan to make the interior of your restaurant match up to your imagination, and allow it to reflect the style you want and the food you serve. This will improve reviews, and bring in more foot traffic.
Inventory and Equipment
It is hard to over-estimate how important better equipment is in the cooking game. You need the right stoves, the right amount of burners and cabinet space and prep area. If the kitchen is too small or chaotic, it impacts both service and quality. The best chef is only as good as his or her knives. Equipment problems can sink even the best restaurants.
You know that little out-of-the-way place that no one ever talks about and you can’t find anything about online? No? That’s because it closed. Don’t let that happen to your restaurant. More money for marketing and promotion can get people in the doors.
At Socotra, we know that the rate of restaurant failure is brutal. It is an incredibly difficult business, and one of the reasons people fail is that they keep repeating the same mistakes. Sometimes it’s out of sheer stubborn cussedness, but oftentimes it is because they don’t have the capital to correct some problems. They don’t know that they have options, like an equity-based hard-money cash-out refi loan from Socotra. We’re here to help your restaurant succeed. Bon appetit!
- Parsa, Self, Njite, & King (2005). “Why Restaurants Fail.” Cornell University Publishing. http://pitchforksoptional.com/wp-content/uploads/2011/12/restaurantsfail.pdf ↩