Which way is best for your business?

There’s more than one way to fund a pub, say finance specialists

While shock-waves from the recession may still be creating tremors in the economy, conditions have improved when it comes to seeking finance. So could now be the time for on-trade operators to consider a new investment?

Finance sector firms certainly seem to think so, and argue that there are now a number of routes open to operators to help them secure the best package for their businesses.

refurbished bar

Adrian Foster, associate director at Christie Finance, reckons market conditions have improved in the last two years, leading to a “noticeable uptick in terms of clients seeking funding and in lender appetite for new business across the licensed and leisure markets”.

“In the last 18 months there has also been a noticeable improvement in lender attitude towards new entrants to the sector, who have scalable business plans, sector experience and some capital to invest,” said Foster.

It isn’t just appetite for investment that’s been growing in recent years.

Richard Morley, director of Liquid Finance, suggested the number of funding options available to licensed trade operators has also expanded.

“Compared to two or three years ago, licensed trade operators have a wider choice of places to go for finance but the challenge for them is to understand how they will work for their business and how to access them in comparison to just walking into their high street bank,” said Morley.

Paul Mildenstein, of alternative finance firm Liberis, agreed that there is a wide variety of options available to publicans – and prospective publicans – and outlined how some of these can be useful for the licensed trade.

Mildenstein said overdrafts and small loans are “very much in demand” from the licensed trade but added that the duty of care that must be exercised by banks “means that if they don’t believe the business can make the repayments they shouldn’t fund them”.

For operators with less collateral to use as security on a traditional loan, enlisting the support of a ‘crowdfunding’ firm is an option for some.

“These companies bring investors and borrowers together to provide start-up finance in return for equity or a higher return on the investment compared to other savings or interest bearing instruments,” said Mildenstein.

“Subsequent finance can be taken to support cash flow needs as the business matures. If some collateral or assets are available then they can approach banks as well as alternative funders.”

Morley, at Liquid Finance, highlighted a cash advance as another finance option. 

Liquid Finance offers this service by providing funding which is secured as an advance against future card payments to the business. 

Morley said this type of financing is “particularly popular within the licensed trade and hospitality world”, adding that although alternative financing is not likely to replace bank finance, it does augment the finance market “allowing small businesses new ways of financing their future”.

Whatever method of finance operators choose, Morley said it is vital to seek out expert advice before committing to any particular package.

“Those experts that can help are ideally suited to find the most appropriate form of funding for each opportunity,” he said.

Ian McDougall, managing director of accountancy firm McDougall Johnstone, said operators applying for finance need to do their homework.

“[Applicants] need a compelling message of what exactly it is that the concept or idea is offering and why it will be successful in a crowded marketplace,” said McDougall.

Operators should have a “track record of historic success”, said McDougall, adding that this need not be unblemished “but a good strong record of managing business challenges and rock-solid detailed financials that demonstrate the lender will get paid back”.

McDougall also advised operators against being overambitious with their timescale.

“Don’t assume that you will hit your peak revenues too quickly; all good businesses take time to grow, develop and enhance their reputations so don’t be afraid to show that income will build and may even drop in certain times of the year,” he said. 

“Most lenders lend on a long term basis and although they want to
see a positive cash flow early they don’t expect a new operation or
refurb to generate big returns immediately.”