Franchise proprietor of Del Taco, based in Georgia and Alabama, files for bankruptcy protection
In a challenging financing environment, the quick-service restaurant franchisee Matador Restaurant Group, owned by Red Door Brands, finds itself grappling with financial difficulties. The company, which operates Del Taco restaurants among others, has filed for bankruptcy, citing cash flow issues exacerbated by Merchant Cash Advances (MCAs).
Matador Restaurant Group, based in Greenville, South Carolina, turned to MCAs to address its cash flow problems. However, these loans, which offer fast funding without credit checks by purchasing future receivables, have only served to deepen the company's financial distress.
The high cost of MCAs, with effective annual rates often reaching 100-200%, far exceeding conventional loans, can rapidly exhaust available cash. Repayments, which are often automatically withdrawn daily via ACH or as a percentage of daily sales, do not flex with sales. This rigidity can severely strain cash flow, particularly during periods of slow business, risking operational disruption.
Stacking MCAs compounds the risk, as multiple advances can drain daily deposits, leaving little or no cash available to manage ongoing expenses. This situation can accelerate financial difficulty, leading to legal and operational hazards such as lawsuits, account freezes, or liens filed against the business under the Uniform Commercial Code.
Moreover, MCAs do not build credit and come with short repayment periods, often requiring payment of a factor rate multiplier on the principal sum. This makes them very expensive and risky over time. The unpredictability of sales, where repayment is tied to future sales, also poses a significant risk. Any downturn or surprise expenses can destabilize the franchisee’s ability to service the advance, risking default and severe financial penalties.
For a franchisee like Matador Restaurant Group, whose profitability is highly sensitive to tight margins, seasonal fluctuations, and supply cost spikes, relying on MCAs can quickly turn a short-term cash crunch into a long-term financial crisis. These advances can trap franchisees in cycles of expensive debt repayment that reduce funds available for daily operations, impair growth, or even force closures.
The bankruptcy filing of Matador Restaurant Group highlights the challenges faced by Del Taco and the current financing environment. The Del Taco chain, with about 600 locations, has struggled for the past year and a half, with five consecutive quarters of falling same-store sales. The parent company, Jack in the Box, is selling the Del Taco brand and expects to find a buyer by the end of the year.
In Colorado, a large and relatively new Del Taco operator's bankruptcy filing temporarily closed all but one of the chain's restaurants in the state. The bankruptcy filings for the operations run by Red Door Brands (excluding Del Taco) have cited the problems with the Del Taco operation and the MCA financing.
Matador Restaurant Group, which has more than $2.7 million in 10 separate MCAs with nine different entities, filed for bankruptcy to stop collection efforts and allow for reorganization. The MCA providers in the Matador case have asserted their interest more aggressively over the past month.
The case of Matador Restaurant Group serves as a cautionary tale for quick-service restaurant franchisees. While MCAs offer rapid funding, their high cost, rigid repayment structure, and associated legal risks mean they should be approached with extreme caution. Alternative financing with clearer terms and lower costs may be safer to preserve sustainable operations and profitability.
Matador Restaurant Group, in trying to address its financial woes through Merchant Cash Advances (MCAs), found that the high cost and rigid repayment structure of these loans further deepened its financial distress. With the effectiveness of MCAs questioned and alternative financing options presented as safer for business sustainability, the bankruptcy filing by Matador Restaurant Group underscores the need for careful consideration in choosing financing methods for quick-service restaurants.
