The crunch is complicating restaurants' economic difficulties beyond a shortage of diners, experts say.

As purveyors face constraints with lenders, they may limit the amount of goods that restaurants can buy on credit, said Robert Angelone, chief economist at The Epicurus Institute, a Wall based economics research organization. And restaurants "can't borrow to get themselves through this tough time," he said. "The economy is not going to be recovering quickly, so the banks are not willing to lend to these restaurants, because they're a bit more risky in the banking industry's view."

Since there are few barriers to opening a restaurant, they have a much higher failure rate than other ventures, said James Vaccaro, chairman and chief executive officer of Central Jersey Bank NA, in Ocean, where restaurants make up 5 percent of the bank's clientele. Because of this, banks typically require a restaurant owner to be obligated personally for financing, and may create collateral packages if the proprietor owns the restaurant's real estate.

Without financing from banks, restaurants must rely on their own resources, Vaccaro said. "It's a function of how well you're capitalized, either at inception or through earnings that you're able to build up during a period of time," he said.

Angelone sees the restaurant industry becoming a cash-based business as a result of the liquidity crisis, as customers with reduced credit pay more with hard currency and suppliers require more cashon-delivery payments. With cash payments, restaurants "don't have to pay additional fees; they don't have to worry about late charges on their bills."

- Evelyn Lee
Published in NJ Biz, December 1, 2008