Outside Insights | November 2013 | By Jeremy Brown

Working Capital

Working capital helps chains of all sizes stay financially fit for the long term.

Working capital can help owners buy new equipment, renovate stores, and more.
Working capital can help restaurant owners buy new equipment, renovate stores, open a new unit, and more. thinkstockphotos.com
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Take a look at the following statements, and guess which one came from a business luminary and which came from a restaurant industry pioneer:

  • “Small businesses don’t fail for lack of capital.”

  • “The growth challenge looms even larger in the brutally combative restaurant industry, where four out of five new concepts fail. After all, it's not like the country is clamoring for another restaurant.”

The first quote comes from Internet entrepreneur, Dallas Mavericks owner, and judge for ABC’s “Shark Tank” Mark Cuban in a Bloomberg BusinessWeek interview conducted earlier this year. 

Based on his success, I’d gather there is some practical truth to the statement. Surely many big ideas fail for reasons other than capital—whether it’s lack of differentiation, poor execution, work ethic, or something else altogether. 

Though capital may not be the reason a business fails, a lack of access to capital can make it difficult to grow. Along those lines, it wouldn’t be surprising if Cuban continued that thought with the unspoken conclusion of, “but boy does having capital at the ready increase your chances of success exponentially.” 

The second comes from Panera Bread founder Ron Shaich and echoes a belief he has espoused in many forums and ways before: You better be good, or odds are you’re not going to be around for the long term. 

Shaich often suggests that the status quo, even when done well, is a losing proposition to staying ahead of the competition, or even relevant. 

Capital is critical to a restaurant’s long-term success, whether it’s the local mom and pop restaurant or a franchisee at an established chain.

Continuous investment in the restaurant business only gets you modestly ahead, as the competitive nature of the industry has even the best of breed fighting from behind.  

These two statements and views butt heads around the importance of working capital, or a “continuous investment,” in the survival and growth of restaurateurs. 

While Shaich puts the failure rate at four out of five restaurants, the National Restaurant Association places it as high as 90 percent for restaurant companies. Most restaurants fail within their first few years, with many failing the second year, after having worked through their start-up capital in year one. 

That’s where working capital comes in. Capital is critical to a restaurant’s long-term success, whether it’s the local mom and pop restaurant or a franchisee at an established chain. It’s the reality of being in a business where there is little to be capitalized and business can be cumbersome and unpredictable. 

The restaurant industry is RapidAdvance’s largest client. We provide working capital that finances new equipment purchases; allows the local pizza place to advertise its “Two-Pie Tuesday” special; gives franchisees the ability to renovate or remodel when the parent company requires it; and helps businesses purchase additional inventory to get ahead of an opportunity or truly go for it by opening up additional locations or buying out a competitor. We have restaurant industry clients that come to us for small business loans, merchant cash advances, and line-of-credit products.

Working capital has been effectively used to drive success of the business for one Quiznos franchisee. This individual has turned to working capital four times and considers it both the key to his survival and his success. 

Over the course of the last five years, the franchisee has borrowed roughly $60,000 for distinct purposes ranging from upgrades and renovations in his restaurant to ensuring adequate cash flow for business operations and needs during the restaurant’s more challenging summer months.

Perhaps most interesting is this owner’s use of working capital to partially finance and ultimately profitably sell another unit; he even says it’s a strategy he will employ in the future. 

There are countless examples of restaurant companies that tap the lending market for working capital many times. These are hardly signs of desperate companies; rather, they might be best classified as smart operators and opportunistic entrepreneurs.

Clients that access capital multiple times are making the continuous investment in innovation and growth and often prove the most successful. That might not surprise those in the industry who believe that continuous investment in the business toward building and rebuilding competitive advantage is a key determinant of success.    

Jeremy Brown is CEO of RapidAdvance, an organization that has provided more than $500 million in customized funding solutions to more than 10,000 small businesses.