As I’ve probably mentioned lately, I’ve recently worked with several clients on debt-raise projects.  Based on that experience, as well as others over the years, I’ve begun to identify a malaise among credit providers which I’ll refer to as Lake Wobegon Syndrome.

By now, probably most people are familiar with Garrison Keillor’s Lake Wobegon.  For those among us who aren’t aware of it, he describes it as a town where “all the women are strong, all the men are good-looking, and all the children are above average”.  There’s a recognized Lake Wobegon effect, otherwise known as Illusory Superiority (Wikipedia link: Illusory_superiority) which “causes people to overestimate their positive qualities and abilities and to underestimate their negative qualities”.  That’s interesting, and we all know sufferers and victims, but it’s NOT today’s subject.  Instead, the phenomenon I’ve identified is that all lenders tend to seek borrowers which are “strong, good-looking, and above average.”  [Interjection of personal observation ... Well, DUH!]

There’s a very obvious and compelling reason for this among bank and other regulated lenders: having identified the parameters which tend to suggest success or failure in an industry (in our restaurant world, this might include unit-level sales volumes, cash-flow margin, leverage, and other telltale markers), our friendly lenders are compelled by their credit or risk managers to only book loans for borrowers on the successful side of the line.  Reason?  These credit and risk managers must answer to regulators, who are generally not experts on the various industries.  For job preservation reasons alone, it’s easy to understand why these multiple layers of explicit or implicit approval lead to a narrow view of acceptable risk.  While I’ve described some restaurant-specific parameters, this syndrome seems to be occurring in various industries.

So, because nature abhors a vacuum, as the regulated lenders have narrowed their focus, a group of alternative lenders has arisen.  Understanding that the banks will seldom compete with them for the borrowers which are perceived as below average, they tend to structure higher-cost debt facilities aimed at compensating themselves for the higher risk.  (Feel free to insert the word “perceived” at appropriate points throughout.)  All this is fine and good -- it’s how markets work, right?  If a provider fails to serve a pool of customers, someone else will, and will price their services appropriately.  Here’s the interesting wrinkle: many of these non-regulated lenders have apparently concluded, rightly or wrongly, that the banks won’t compete for all the “above average” business; as a consequence, many of these lenders are now searching for the “above average” borrowers themselves, and backing away from the “below average” borrowers who would have been expected to pay their higher fees and interest rates.  I haven’t yet been able to determine whether these lenders have gotten burned, and are therefore backing away from risk, or if they just believe there’s an opportunity to charge above average rates for borrowers which (one would think) should qualify for better terms.  I welcome any experiences or observations.  Meanwhile, some of those “below average” operators and borrowers, including more than a few whose results and profiles really are NOT below average, are now stuck with few or no lenders willing to support them at any cost as standards tighten among the non-regulated lenders.  It’s an interesting, but perhaps hazardous, phenomenon, a situation which will likely force yet more closures and distressed sales across several industries in coming months and years.  The economy continues limping, at least in part for lack of liquidity.

Views: 126

Tags: debt_capital, economy, financing


You need to be a member of FohBoh to add comments!

Join FohBoh




Social Wine Club for Craft Wineries


GrubHub: Hotel guests rely more on local restaurants

Online orders from hotel guests jumped 125% over the past three years, as travelers cut spending on room service and opted fo -More

GHIRARDELLI® — Premium, Indulgent, Versatile
81% of consumers prefer to order products Made With Ghirardelli ingredients and 72% will pay more for them. For samples, recipes or to consult with one of our chocolate experts visit

Tweet this: What did your #FirstJob teach you?

Team work, multitasking and customer service are among the lessons restaurant employees learn early on.  -More

Many contenders are seeking to become a breakfast champion

Yum Brands, Burger King and others see big potential for growth and profit in breakfast as consumers move away from cereal, b -More


Posting a job or finding a job starts here at FohBoh. Call us about special $50 posting packages to syndicate across all major jobs boards.

National News

National Restaurant Association Applauds Workforce Innovation and Opportunity Act

Today the National Restaurant Association (NRA) praised federal leaders’ commitment to workforce training programs through the Workforce Innovation and Opportunity Act. NRA’s Executive Vice President of Policy and Government Affairs, Scott DeFife, issued the following statement of support:

Restaurant Trends - Growing And Emerging Concepts - Change and Activity July 22, 2014

Update from on growing and emerging restaurant concepts

Tropical Smoothie Café Commits $20 Million for Franchisee Financing

Tropical Smoothie Café, with the backing of private equity firm BIP Capital, has launched a financing program to help existing franchisees open additional restaurants nationwide by providing up to $20 million in loans.

Domino's Pizza Announces Second Quarter 2014 Financial Results

Domino's Pizza, Inc. (NYSE: DPZ) announced results for the second quarter of 2014, comprised of strong growth in both same store sales and global store counts, which resulted in 17.5% EPS growth, or 67 cents per share.


If you are looking for capital to start or grow your restaurant, create the next 501c3, develop and launch the next app for the restaurant industry,or want to help your peers in some meaningful way, we want to know about it.


TED: Ze Frank: Are you human? - Ze Frank (2014)

Have you ever wondered: Am I a human being? Ze Frank suggests a series of simple questions that will determine this. Please relax and follow the prompts. Let's begin …

TED: Heather Barnett: What humans can learn from semi-intelligent slime - Heather Barnett (2014)

Inspired by biological design and self-organizing systems, artist Heather Barnett co-creates with physarum polycephalum, a eukaryotic microorganism that lives in cool, moist areas. What can people learn from the semi-intelligent slime mold? Watch this talk to find out.

TED: Shih Chieh Huang: Sculptures that’d be at home in the deep sea - Shih Chieh Huang (2014)

When he was young, artist Shih Chieh Huang loved taking toys apart and perusing the aisles of night markets in Taiwan for unexpected objects. Today, this TED Fellow creates madcap sculptures that seem to have a life of their own—with eyes that blink, tentacles that unfurl and parts that light up like bioluminescent sea creatures.

TED: Nikolai Begg: A tool to fix one of the most dangerous moments in surgery - Nikolai Begg (2013)

Surgeons are required every day to puncture human skin before procedures — with the risk of damaging what's on the other side. In a fascinating talk, find out how mechanical engineer Nikolai Begg is using physics to update an important medical device, called the trocar, and improve one of the most dangerous moments in many common surgeries.

© 2014   Created by FohBoh.

Badges  |  Report an Issue  |  Terms of Service