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Wall Street Journal: Restaurants Aren’t As Risky As Thought

I’ve been saying for awhile now (10 years!) that restaurant failure rates aren’t what most people think and that for the restaurants that do fail there are almost always obvious and avoidable reasons behind those failures.

Now no less than a business bastion as the Wall Street Journal has come out with an article further proving that the idea of restaurants as the riskiest businesses is not true. They examined data from the SBA loan program and found that while restaurants received the highest total number of loans (59,426 between full service and limited service concepts in the last ten years) they definitely did not have the highest default rate.

Aside from that, the Journal points out that there is no way banks, who stand to lose money despite the government guarantee on these loans, would keep making these loans if they were so risky.

If 9 out of 10 restaurants fail, as you often hear people say, then no restaurant would ever be able to borrow a dime. Since in fact nearly 60,000 restaurants did get loans- over $13 billion dollars worth of loans- obviously they aren’t as risky as people like to think.

In fact, here are the actual bank loss rates for these loans:

Only 4.4% of full-service restaurant loans were charged off — or written off as a loss after the SBA collected personal guarantees and other collateral put up against them. Some 6.3% of limited-service restaurant loans were charged off.

Of the total number of industries that got SBA loans, the loss rates for restaurants were not the top losers. In fact:

Of the 1,128 industries that received SBA loans between Oct. 1, 2000 and Sept. 30, 2010, the government’s last fiscal decade, full-service restaurants placed 408th in the charge-off rank, and limited-service restaurants placed 204th.

Here’s how the Journal sums up the findings:

Establishments in the leisure and hospitality sector have survival rates that are on par with other industries, according to a 2005 study from the Bureau of Labor Statistics. Combine that research with the loan-failure figures provided by NAGGL, and there’s a case to be made for restaurants: Maybe they aren’t that risky, after all.

And I will take it a step further and again say- of the ones that do fail, you can nearly always identify the reasons behind the failure and not just with hindsight but from the very beginning.

That means, if you take the time to do a proper restaurant business plan and make sure your restaurant business financial projections are on target and well researched then you can eliminate these reasons for failure as well and stand an excellent chance of being successful when you open a restaurant.

As much as many people would like to warn you off about it, the truth is owning one (or more) profitable restaurants is not only something that is within the reach of almost anyone willing to put in the effort to make it happen but it is also true that it has the potential to make you a lot more money than just about any job you are going to get and many other businesses you could own.

Take a look at this restaurant success story if you have any doubts!

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