For restaurants, and their lenders, a tough environment comes home to roost

Interest rates have soared, adding a big cost to operators needing to refinance. | Image: Shutterstock

The mood at the Restaurant Finance and Development Conference this year wasn’t exactly jubilant, which is what happens when the weeks leading up to the annual event is marked by a string of operator bankruptcies.

They include the big bankruptcies of the large Wendy’s operator Meritage Hospitality, the Yum Brands franchisee Encanto, and the Outback Steakhouse operator Out West. There were several other smaller but no less notable bankruptcies, including one involving a Papa Johns franchisee that declared Chapter 11 during the event.

Restaurant bankruptcies have soared this year. According to the website BankruptcyData.com, there have been 683 restaurant bankruptcies so far in 2026, 22% more than all of last year and 34% more than in 2024. At least 26 large, multi-unit restaurant franchisees have sought credit protection so far this year, more than all of last year.

“I’ve lived through quite a number of” cycles, said Cristin O’Hara, restaurant group head at Bank of America, at the conference. “And I think this is one of the toughest since maybe the financial crisis.”

Don’t expect this wave to abate anytime soon. Weakened performance in many legacy franchise chains and a tightened credit market will likely result in more out-of-court workouts, bankruptcy filings, and closures among franchisees and other operating companies.

This is especially true in legacy fast-food chains where traffic problems and an ongoing value war have sapped profitability for years.

“I do think there will be a continuing wave of closures in that segment, more so than the others,” Michael Eagen, a longtime industry lender, said in an interview.

Interest rates are a huge problem, even for otherwise well-performing operators. Many restaurant companies took out loans in 2021, when the prime interest rate was 3.25%. Those loans are starting to come due, meaning operators have to refinance that debt.

“A lot of the 21-22 vintage financings that are five-year and seven-year money are all going to be refinancing for the next two years in both performing and underperforming brands,” said Brett Bishov, founder and managing partner of the investment banking firm Capital Insight.

Yet today, the prime rate is 7%. On a $2 million loan, that’s another $75,000 per year in interest payments. And that’s assuming they get the same rate they did before. A borrower who has to pay another 2% in additional interest on that $2 million loan would pay another $40,000 in annual interest.

Those interest rates aren’t expected to go down anytime soon. The October consumer price index came in higher than expected, which could lead the U.S. Federal Reserve to raise interest rates further.

Higher borrowing costs will hurt operators’ ability to invest in remodels, equipment, or expansion. “That cash flow could have been used to invest in restaurants, whether it’s maintenance or building new restaurants,” O’Hara said. “It has absolutely affected the ability to grow the business.”

This is assuming that they can get lending at all.

Credit in the restaurant space is as tight as it’s been in years, as weakness in the restaurant space causes lenders to back off.

We spoke with one lender privately who acknowledged that they’ve slowed loans in the space. He cited weakness among legacy brands, and the uncertainty of performance among emerging chains.

The environment has affected even some brands that have historically not had such problems before. Some McDonald’s franchisees have had to go outside the company’s traditional lenders to get financing because banks are more skittish on the industry than they’ve been. Some operators are now signing personal guarantees, something they hadn’t done in the past.

The lack of financing has led to a surge in the use of alternative financing sources, notably merchant cash advance companies and businesses that provide financing in exchange for a portion of credit card receipts or even their delivery sales. Several of the operator bankruptcies this year have included that type of debt.

Lenders’ skittishness is coming because of a perception that the fast-food sector’s growth will be muted for some time. Low-income consumers have slowed spending, hurt by inflation, rising gas prices, and other factors. The popularity of GLP-1 medications is certainly influencing consumer dining habits. Weak population growth is also playing a role.

Higher food, labor, rent, insurance, and other costs have eaten into profit margins. Technology innovations have had an uncertain payback, at best. And the popularity of third-party delivery is saddling operators with large numbers of low-profit orders.

The weak environment was not expected back in 2021, when fast-food restaurant sales recovered faster than expected, prompting major deals for restaurants at sky-high multiples. Lenders jumped into the space with aggressive terms.

“Lending reached a peak in 2021 in the franchise space,” Eagen said. “The buyers of those restaurants pushed maximum leverage because the lenders were offering it. Today that is coming home to roost, and not so much because of leverage, but because of the compression in operating margins for those franchisees, and maybe mismanagement of some of the brands, slack demand for some of the brands, and it’s turning into workouts and loan losses.”

That said, financing remains available for good operators and good brands. “There’s a scarcity of capital for underperforming brands,” Bishov said. “There’s a plethora of capital for performing brands.” Yet even good operators in struggling brands can get financing.

Said O’Hara: “I think there’s still a ton of interest in the restaurant space. I think it’s just more discerning because of what these brands have lived through.”