Right now, credit is tight and investment capital is practically nonexistent. Inevitably, the consolidation of the banking industry will have a detrimental impact on restaurants nationwide.

Even in a business based on flavor, there’s no need to sugarcoat the truth: The restaurant industry is facing hard times. In December, the National Restaurant Association (NRA) released its 2009 Restaurant Industry Forecast that predicted although 2009 restaurant industry sales will exceed $566 billion – a 2.5 percent increase from last year – the numbers translate to an inflation-adjusted decline of at least 1 percent. And that’s putting it kindly.   

Right now, credit is tight and investment capital is practically nonexistent. Inevitably, the consolidation of the banking industry will have a detrimental impact on restaurants nationwide.   

Owners need to educate themselves on the specific effects the financial world will have on their businesses. This was made evident at a roundtable seminar at the NRA, Hotel-Motel Show in Chicago on May 18. Key players on the panel were: John Hamburger, president of Restaurant Finance Monitor; Bernie Siegel, founder and chairman of Siegel Financial Group; David Pittaway, restaurant specialist for Castle Harlan Investment Bankers; Alexandra Burke, managing director of Wells Fargo Restaurant Group; and Kevin Cronin, senior executive for Bank of America’s Global Corporate Banking Group.   

Cronin set the table by reviewing recent events. “The Lehman bankruptcy – the largest failure in financial institution history – precipitated a global economic scare,” he said. “The deepening crisis drove funding costs higher, reducing liquidity and spreading to markets globally. To get the housing market working again, the government has stepped in, nationalizing Fannie Mae and Freddie Mac in the process. Bank credit standards are at an all-time high and individual borrower performance remains challenged. We are headed for a time of more simplicity and transparency.”   

The GDP (gross domestic product) contracted by 6.1 percent in the first quarter of 2009, but Bank of America expects a modest recovery for the second half of the year. “The pace of decline is slowing, indicating a potential bottom,” Cronin said. “But the U.S. economy won’t return to where it was in the second quarter of 2008 until fall 2012. For consumers to begin spending again, we need the savings rate to increase above 8 percent. But the United States has never been a nation of savers.”   

Cronin said borrowers in the restaurant industry must maintain a market-leading position, a strong credit profile and a significant free cash flow to repay debt if they have any hope to secure a loan. Burke of Wells Fargo agreed. “Somebody told me bankers were the new lawyers,” she said with a chuckle. “Even in the go-go days, restaurants were not bankers’ favorite kind of borrowers and, with the consolidation of franchise lenders, there is a shrinking universe of lenders for the restaurant industry.”   

Despite the grim news, she offered four tips for businesses to sustain themselves in the troubled economy: “Know how to position your company for success with lenders, keep business plans simple and conservative, expect limited capital for new investments and always remember that relationships are critical.”   

In this economy, the fast-food industry is “best positioned in terms of customer loyalty,” Burke noted. “And you can see it in the sales. With that being said, we’re still active in a lot of restaurant businesses – McDonalds and Taco Bell are two of them.”    

Companies that have not reached fast-food global enterprise status might have a better shot at private equity investing; but according to Pittaway, start-ups need not apply. “That’s why most turn to friends and family,” he said.    

For the smaller mom-and-pops, there’s always the Small Business Administration (SBA). “Let’s remember that 50 percent of all jobs come from small businesses, and the restaurant industry is a large part of that,” Siegel said. “[Washington], D.C., needs to eliminate lender fees to the SBA and allow lenders to charge higher rates temporarily.  

“What we need as an industry is sales,” Hamburger added. “Sales will have to turn positive for any meaningful lending to take place.”