Finance when you really need it

Whether you require financial backing to renovate or refurbish your property or you need urgently to restructure your loans, there are lenders out there awaiting your business. Bill Lumley examines some of the approaches hospitality business owners can take when a cash injection is needed

However fantastic your business may be, how superb your service, unexpected, unbudgeted issues can always emerge. With Spring just a few months away, now may be the time to begin the process of underpinning your plans to spruce up your business ahead of next year’s high season.
The approach to raising finance is seldom straightforward and can depend on the nature of your property. For example, one unique problem for many B&Bs compared with hotels is that they may have residential mortgages, being primarily a family home. Often this can cause difficulties when an additional mortgage or loan is sought for business purposes.
B&B Association chairman David Weston says: “Different lenders have different criteria for business loans, but we know of one instance when the owners of a Somerset property with a residential mortgage applied to their bank for funding for an extension for a guest dining area. The lender then demanded the repayment of the whole property mortgage on the grounds that they did not realise the extent of the business activity. A business mortgage would have been unaffordable, so the owner felt it necessary to close the business and sell the whole property.”

A sector view

The pubs and restaurant sector has experienced a high level of appetite from private equity and trade investors for well over 10 years, according to M&A partner at BDO in Manchester Rob McCann. He says: “These groups were typically attracted to concepts and chains offering the consumer experience-led eating and drinking and were able to demonstrate something different to their competitors. For example, we have seen a strong trend towards local and authentic trends, particularly in the gastro-pub and country dining space.” Meanwhile in towns and city-centre locations, premiumisation of drinks has been a factor in their success – for example, the craft beer revolution, and the trends towards botanical gins or cocktails, which show little sign of slowing, he says.
Other factors that remain a constant on the checklist for investors are a strong and dynamic management team, a scalable concept model, and appropriate arrangements in relation to their property estate, he adds.
Private equity groups will typically look to acquire small independent bar or restaurant concepts and roll these out to wider locations. Therefore, those chains successful in attracting private equity money have typically been those where the concept has relevance to a wider or national audience, together with having an in-house strength in identifying and negotiating good property deals with landlords, he explains.
But he says: “While the sector has traditionally been a buoyant one, the pubs and restaurant space has faced economic challenges of late. It is difficult to draw a trend in the causes of these failures, but one might observe that overly aggressive roll-out strategies combined with inflexible property arrangements and very high levels of debt could be factors here. Therefore, those operators attracting capital at the current time will be those who continue to work hard to differentiate themselves, but do so in a cost-effective, simple and very flexible fashion, such that they may adapt to changes in economic sentiment and to changes in consumer tastes, which are frequent and far-reaching.”
If your business is trying to attract investment, preparation is key, he says. “Investors are looking for an experienced and ambitious management team with a well-considered roll-out plan. Preparing a flexible and integrated financial model enables investors and lenders to easily review and analyse the business plan ensuring momentum is kept up during the process,” he concludes.

Presenting your case to the lender

Whether you are in financial difficulty or your business is doing well, the approach to being awarded a loan is the same, according to B&B consultant Yvonne Halling. In order win the bank’s approval, you must have a solid plan, regardless of the circumstances.
She tells Luxury Bed & Breakfast: “In my own case in 2010, when the bailiffs were at the door I was really financially strapped. The gas had been cut off and I found out the mortgage had not been paid for a year.”
She says she wrote a long and considered letter to the bank. “I explained precisely why we had got into the situation, what I was going to do about it, and why I was confident I could do it,” she says.
“I had no tangible evidence it would work, but I understood how business worked and how the internet worked, and I knew exactly what I was going to do.
“Even if you have no proof you must be confident in your plan even though you may have no clue it will work,” she stresses.
This does not mean putting together a complex spreadsheet plan, but rather telling a convincing story backed up with some knowledge, determination and passion to follow it through.
One of her clients, whose business was doing well, wanted some capital to refurbish her B&B, an old property that needed a comparatively high level of maintenance. “I advised her to do the same: tell the story behind why you need the money and how you propose to pay it back. Explain you know what to do and why they should back you,” she says.
The biggest challenge for B&B owners is they are not typically business people, she stresses. “They have no idea what their product is, nor why people would buy it from them. They don’t think like that, and therefore banks often won’t lend to them, because they don’t come across as professionals and business people.
“You don’t need a ton of spreadsheets top back it up – just need a simple one, setting out what you did last year, where the opportunities are in the market, and how you are going to reach those people and turn those opportunities into money.”
Nowadays the UK has few if any small business lenders, and hospitality owners must generally deal with big commercial banks, she says. “One of my clients in Dorset is restructuring her loan to get some cash for refurbishment, and the lender has been fantastic, not least because they have come out to see her property. It’s a good idea to get the back manager to come out and see you and your business in your habitat, for then you have the upper hand. You are in your own domain and the energy of that will transmit in the form of confidence to the bank manager. They are a new lender and have been out to see her.”
Unfortunately, most B&B owners are not professional business people, she says. “They almost have the attitude of a beggar when they approach a bank, when actually the banks are helping them do what they are supposed to be doing: If they don’t lend, they will go out of business.”
If you are just coming to the high season you are a bit strapped for cash then a small finance company can provide you with a convenient drawdown facility that will simply be approved, she says. “You have to be careful as the interest rates can be quite high. If you are doing a refurb and you need longer to recoup your money then I’d go to the bank and get a business loan,” she suggests.

Merchant cash advance

If B&B owners wish to renovate their property to increase their value and thus their guestroom prices, there are certain considerations to bear in mind.
Head of marketing at 365 Business Finance Martin Kennington tells Luxury Bed & Breakfast: “We see a lot of B&B owners taking our merchant cash advances for this sort of renovation, be it a simple update of a room or two, or a full refurb of the building. It’s important to keep the building and rooms up to date, as guests’ expectations have changed in recent years and they are ever more demanding (and willing to make their opinions known!) Replacing old furniture, ensuring the beds are of the highest quality, improving the aesthetics of common areas and – essential nowadays – ensuring there’s a strong Wi-Fi signal throughout the property are all key considerations, even before embarking on the larger renovation projects or expanding the building,” he adds.
From a financial perspective, it’s important that the B&B owner considers the impact of renovation on short term cash flow, he says. “If any number of rooms are out of action for refurbishment, it means a potential loss of income from those rooms. This needs to be weighed up against the post-refurb gains, namely greater demand for the higher-spec rooms and increased nightly rates – not to mention the upside of having ‘instagrammable’ rooms to aid in marketing efforts.”
There are some key differences between a merchant cash advance and a traditional bank loan. A bank loan is set over a fixed period, with fixed repayments regardless of how well the B&B is performing financially. A merchant cash advance has no fixed period and the fee is agreed up-front, so it doesn’t cost any more regardless of how long it takes. There are no administrative charges and no late fees and payments are made as a small percentage of the business’ card sales. This means if you have a slow month, you’ll pay back less; the repayment amount depends on the performance of the business. A bank loan typically requires security and a business plan, whereas a cash advance requires neither. A cash advance is also a much faster way of getting capital for your business, with funding in as little as 48 hours, unlike banks that typically take several weeks.

The merchant cash advance principle

There are other finance options, many of which involve giving away or risking equity in your B&B. Credit cards are another option, however the costs can spiral once repayments are required and the debt only rises over time. Martin says he has witnessed a 44% growth in demand from hotels and B&Bs over the past six months alone, as owners are seeing a need for finance in order to improve their premises, expand, pay VAT bills and maintain a healthy cash flow.
“Our merchant cash advance was designed so that there could be no debt spiral. Repayments are flexible according to how well the B&B is doing, for instance, if January’s bookings are lower than other months of the year then the repayments over that month will be lower. The business is thus not throttled for cash when takings are down,” he says.

Risks to consider

It’s important to understand what the money is needed for and to weigh that up against the expected returns on that investment in the form of more bookings and more money into the business. You should also be wary of companies that offer unrealistically large loans and putting yourself at risk of borrowing more than your business can comfortably repay.
Martin says: “We lend up to maximum of the monthly average card takings. If a B&B takes £10,000 per month on card sales, we could lend them £10,000. Our minimum advance is £5,000 but we can advance up to £200,000 if the business is generating that much in monthly card sales. The key stipulation is that the B&B must have been trading for a minimum of six months.”
There are cheaper options he agrees, but they will always require security and fixed terms, plus set monthly payments, he says. “It is all too easy to get caught in a debt spiral, compounding loans on top of loans. A merchant cash advance is designed to be flexible and not put financial strain on a business.”
B&B Association chairman David Weston offer a tip to B&B owners. He says: “Do look into your entitlement to capital allowances, as you may be able to apply for these in respect of some building work and/or equipment purchases, and save tax. The savings can be significant, but this is a complex and technical issue, so you do need to consult a professional,” he concludes.