For restaurants, there’s a funding gap, a chasm between gaining access to the capital they need to thrive and grow and the traditional channels offering that capital.
Mitchell Hipp, divisional vice president at Rewards Network, told PYMNTS the gap can present itself as the pain points of setting up operations and progressing to become mainstays of the local economy.
His insight comes from personal experience. He recounted how he put himself through college by working in the industry. He started as a dishwasher and eventually became an owner-operator.
“I quickly learned the challenges that restaurant owners face,” he said.
Among the biggest challenges confronting restaurants is having the money to keep the lights on, the equipment running and the marketing in place.
“Between the Small Business Administration and banks, not a lot of them want to talk to you,” he said.
In their eyes, restaurants are a risky proposition when it comes to lending. The failure rate as an industry is high, as is the amount of money needed to rent a space, buy equipment, stock inventory and keep staff on hand, with no guarantee of success. In the meantime, banks require a personal guarantee from the business owner that can be onerous if the business hits turbulence.
“Most restaurants are undercapitalized to begin with, and it’s the No. 1 business that fails in the U.S.,” he said.
Most small- to medium-sized eateries only have enough funding to stay open for about six months. Ideally, they should have enough capital to keep going for a few years.
As Hipp said, “Six months goes by quickly when you open up a smaller restaurant. Unless people are flocking through the doors, it almost immediately becomes a situation where [owners] are chasing their tails from day one.”
Through its platform model, Rewards Network seeks to fill the gap left by others and offer quick access to capital to restaurants using its platform, where diners earn points or cash back that can be redeemed across several loyalty programs.
The “flexible funding” option is unique because restaurants using Rewards Network’s Dining Credits program only pay when members spend at the restaurant itself, Hipp said. Through its data-driven model, Rewards Network examines customer volume for a given restaurant and extends capital up front based on that analysis. In essence, the company buys future diners’ spending that’s driven by the platform and the loyalty program itself, all as a way to help fill empty tables and see restaurants succeed.
“We provide the marketing that helps these restaurants grow and the capital to expand in a difficult macroeconomic climate,” he said. “… Everyone in the restaurant business that we work with is looking to grow their revenues.”
Again, speaking from experience, Hipp said in his own restaurant-running days, he was a client of Rewards Network and used the flexible funding option “to get me through slow times.”
The highest cost to a restaurant comes in the form of empty tables, he said. The outfit with 50 tables that only fills half will still have to pay fixed costs (utilities, rent, etc.) even though revenues are pressured.
“Our job is to tap into the member base of the 37 iconic partners that we work with, from the airlines and hotels to the FIs and telecom providers, and get those members of their dining programs to come in and dine at these restaurants,” he said.
The platform’s algorithms determine how many members are within the certain marketplace or region that the client restaurant serves.
The data analysis calculates a “number we feel comfortable purchasing in advance, and if the restaurant qualifies, we’re able to provide them with a check up front, and that gives that restaurant some working capital,” Hipp said.
The funding comes directly from Rewards Network. The cash advanced is akin to buying future credit card receivables; Rewards Network’s Dining Credits program provides a true pay-for-performance model that restaurants love.
Through the next several months, he illustrated with the Dining Credits program, the diners that are sent through the doors “dine down” the account that has been bought from the restaurant. In the meantime, the eatery uses the fresh capital to embrace capital improvements or open new locations (or keep some money in the bank). The payment period typically extends between six and 12 months.
“We’re the only company out there that provides working capital to restaurants and then sends the customers in to pay for it,” he said.
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