How delivery apps are upending restaurant lending

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The restaurant business is changing quickly, and some banks may struggle to keep up.

The rise of delivery apps such as Uber Eats and DoorDash is pressuring the bottom lines of restaurants by reducing their dine-in business. At the same time, restaurant borrowers are looking for different types of loans than in the past, creating opportunities for nonbank lenders to cut into territory that once belonged largely to banks.

Derek Ladgenski, a Chicago lawyer who specializes in restaurant and franchise lending, sees the shift on a constant basis — and not just at work. Each of his four children has a delivery app on their phones, making ordering simpler and allowing them to stay at home rather than dine out.

“It just makes life easier,” Ladgenski said.

The changes are reshaping not only customers' expectations. Eateries are also rethinking how they borrow money.

“With fewer customers coming in, restaurants need fewer capital expenditures and more [shorter-term] operating capital,” said Rohit Arora, CEO of the online lending marketplace Biz2Credit.

That trend seems to be working in favor of online lenders that offer the speed and convenience that many banks have yet to match.

“It’s changing the credit and risk profile" for banks, Arora said. “Banks used to get the best-of-the-best [clients]. ... Now the situation has flipped.”

A November survey by TD Bank provides a glimpse into the changing landscape of the restaurant business. The survey found that 85% of its 254 restaurateur respondents had implemented delivery strategies, with a fifth reporting that deliveries account for more than a fifth of their sales.

"Delivery will be a big part of this business going forward," said Mark Wasilefsky, the head of TD Bank's restaurant franchise group.

Bankers have been pointing to delivery apps as one reason for credit issues in their restaurant portfolios.

BankUnited in Miami Lakes, Fla., said it is closely monitoring its $360 million restaurant portfolio to gauge stress from a shift in customer preferences, Rajinder Singh, the $33 billion-asset company’s chairman, president and CEO, said during a conference call to discuss fourth-quarter results.

Paul Murphy, chairman and CEO of Cadence Bancorp. in Houston, also listed delivery as a pain point. He said during an earnings call last month that the $18 billion-asset Cadence charged off $21 million in restaurant loans last year. He called Cadence's $993 million restaurant book "the highest-risk portfolio in the bank.”

Cadence is reducing its exposure to restaurant loans, which peaked at nearly $1.3 billion. Expect more reductions this year, Murphy said.

Other banks are taking a contrarian view of the delivery phenomenon.

"As the cost of delivery is decreasing, as third-party providers become more efficient and larger operators are able to negotiate more favorable deals, there is tremendous potential for operators to use delivery to account for a greater percentage of their business,” Wasilefsky said.

TD Bank, which generally limits its U.S. retail ambitions to the East Coast, is pursuing a national profile in two Small Business Administration verticals — quick-serve restaurants and early childhood education — as part of a broader plan to double SBA-related franchise lending to $100 million annually over the next three years.

“We're trying to grow that franchise unit,” said Tom Pretty, TD Bank’s head of SBA lending. “There are a select number of franchisees — we're always looking to add more — where we can lend nationally. It's something we continue to look at and think about."

Despite the shifting preferences in the restaurant industry, franchising remains a big business.

More than 733,000 franchises operate in the U.S., according to the International Franchise Association. During the 2019 fiscal year, SBA lenders made nearly 6,800 loans, totaling more than $5 billion, as part of the agency's 7(a) loan guarantee program.

TD Bank made more than 2,960 loans in the program, totaling just under $360 million, in the 2019 fiscal year.

“A lot of the strong franchises we work with, they prefer a nationwide lender,” Pretty said. “We want to be a good partner to them.”

The better-run franchises should be able to adjust their menus and pricing to maximize delivery revenues, Ladgenski said.

Delivery services are "going to be disruptive ... but people are going to adapt to the new model,” Ladgenski said.

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