Restaurateurs | To Go Debt Free, or Not to Go Debt Free?

Steve O'ConnorBusiness Plans, Cashflow, Funding Options, Restaurant, Small Business Financing, Small Business TrendsLeave a Comment

Large Debt Free text.

Some restaurants are going debt-free, but does that make sense for your business? Although some debt is decidedly “bad debt,” other investments can help accelerate your restaurant’s growth. Careful consideration of debt options is essential; read on for questions you can ask for a quick debt self-evaluation.

That is the question. Although the restaurant industry is today a $683.4 billion industry, more frugal customers, a tight credit market, and rising food and operational costs have combined to reduce both sales and margins.

In spite of these challenges, two quick-service restaurant chains have recently announced how their brands have gone debt-free. Going debt-free does, according to QSR Magazine, offer advantages, including a lessened dependency on the economy and freedom of some operating capital.

Good Debt vs. Bad Debt

But not all debt is bad, as the QSR Magazine writer reminds us. In fact, good debt can be defined as “debt on assets that are earning income for you at a rate greater than the cost (interest) on the debt.” Beyond returns, good debt can include payments for anything your restaurant “truly needs but cannot pay for in full without wiping out cash reserves.” Loan payments on your space, repayment plans for merchant capital advances that funded an expansion, and so on may all fall under the “good debt” heading.

Bad debt, in short, is any debt that doesn’t help grow the business. Payments for gadgets that don’t create a return for your restaurant—for example, new kitchen equipment when the existing equipment is still in good working condition—would fall into this bad debt category.

Careful Consideration of Debt Options is Critical

Savvy business and restaurant owners will be wary of debt, but they also understand that avoiding any debt at all costs can be risky. Whether your business is looking to wear the “debt-free” badge, or you’re simply looking for ways to manage the debt you have, having a healthy financial statement is critical to your restaurant’s success. Before borrowing anything, ask yourself a few questions:

  • What do I need the money for?
  • Will the debt help my restaurant make money?
  • How long am I comfortable carrying this debt?
  • Does this debt require personal collateral?

Careful thought and consideration are absolutely essential before taking on any debt for your restaurant. Keep in mind that going debt-free makes sense for some restaurants, but not for others. Only you and your financial advisors can make that call.

 

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