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Financing your future: the best funding options for hospitality business

21 April 2016 by
Financing your future: the best funding options for hospitality business

More and more funding options are available to hospitality operators looking to grow their businesses, but which one is suitable for you? Elly Earls investigates

finance future decisions choices
finance future decisions choices

The feeling among hospitality operators is that investors and lenders have become more open to financing the sector over the last two or three years, and statistics bear this out. Some 44% of hotel and restaurant small businesses used external finance in 2015, according to the BDRC Continental SME finance monitor. This compares favourably to the business population as a whole, where only 37% of the businesses reported making use of outside funding. Moreover, hospitality business owners are feeling increasingly positive about the future, with 51% intending to grow in the next 12 months, up from 42% in 2013.

This external finance is no longer solely coming from traditional lenders like banks or private equity houses. Other options, like corporate cards, business cash advances, asset finance and crowdfunding are gaining traction in the sector too.

With so many options available to operators, it's become more important than ever to shop around and ask the right questions before deciding which route to pursue. Do you have the cash flow to make regular repayments to a bank? Do you want to give away both equity and control to a venture capital investor? Or are you a start-up just looking to get off the ground? In the latter case, crowdfunding could be the way forward.

"The reality is that funders are suppliers of capital. Just as we shop around and look at suppliers, the approach to funding should be the same," says Edward Walsh, finance director for the Coaching Inn Group, which last year, after approaching five or six private equity houses, ended up securing a £4.5m investment from the Business Growth Fund to support its planned £20m expansion.

"You need to get a feel for what deals are out there and what sources of capital are available." Equally, a combination of different types of funding will be the best fit for some businesses.

Banks

Statistics provided by the British Business Bank show that bank lending to SMEs is on the up. "Gross bank lending to small businesses totalled over £15b in Q4 of 2015, significantly up from £9b in Q3 of 2012. We have also just seen five consecutive quarters in which bank lending to smaller businesses has increased," Morgan says.

When it comes to hospitality businesses, the outlook is similarly positive, according to Philip Richardson, industry director of hospitality and leisure at Barclays' Corporate Banking. "Hospitality and leisure operators are enjoying one of the most buoyant periods in recent times. Consumer spending continues to grow and this has increased appetite among the funding community for this asset class. Certain subsectors have also been robust in the downturn, such as casual dining."

This ability to weather difficult economic conditions is key to whether a bank will offer financing - which will usually be in the form of debt funding - to an SME. "We're looking for sustainability of earnings and a company that's likely to be resilient in a downturn scenario," says Rishi Khosla, co-founder and chief executive of OakNorth Bank, a bank focused on supporting growth businesses in the UK. "We also look for strong management. Those are the two ingredients for us - the people and the proof they've created something already."

Richardson adds that this doesn't rule out start-ups - if they are being run by a management team that already has a track record. "It's not only about the financial due diligence, but also the due diligence around that management team and what they bring to that operation," he explains.

Private equity houses

Another recognised route to finding funding is approaching a private equity house or a venture capital firm. This is generally suitable for more established businesses as it's more expensive than debt funding and, as with all financing options, there are pros and cons.

"The downside is that you have to be prepared to give away quite a large degree of control in terms of how you operate the business," explains Jeremy Over, partner, corporate and commercial, at specialist corporate finance law firm Moore Blatch. "A private equity house will want to receive various rights of protections about what you can and can't do in the business without getting their consent, and a lot of these can be quite severe."

Conversely, these sorts of investors also tend to offer a great deal of support to businesses. "In theory, they're not just providing money, they should also be providing strategic direction in a way that's designed to enhance the value of the business," Over notes. "They're probably well connected as well, so they might be able to introduce the company to the right kind of people."

It all comes down to choosing the right investor for your company, Over believes. "Ultimately, you do business with people that you get along with, that you feel comfortable with and that you can work with, and that philosophy applies just as much, if not more so when you're trying to choose your funder."

Crowdfunding

Crowdfunding - where a community of like-minded people pool their money and knowledge to back start-up, early and growth-stage businesses - is the most widely publicised financing option. "Debt options may not be appropriate because they may not want to have the burden of servicing that debt, whereas equity investment is a long-term investment," explains Luke Lang, co-founder of investment crowdfunding platform Crowdcube, which was established in 2011 and today has 271,000 investor members and has raised £153m across 385 campaigns.

Yet, with so many crowdfunding platforms now in existence, it is a competitive route to take. It's therefore crucial to get certain things right. "Having the narrative behind your business and being able to communicate it with clarity and conviction is important," says Lang. "It's also crucial to plan what you're going to do and how you're going to promote it, as well as making sure you don't overvalue your business and that you've got an achievable target. It's about striking the right balance."

On the other hand, even businesses that don't succeed in crowdfunding can benefit from the process by increasing their exposure to investors. "Crowdfunding gave us an opportunity to share our story with a wider audience and acquire championing customers who believed in what we are doing," says Colin Payne, who recently ran a crowdfunding campaign to raise money for his coffee pod brand, Cru Kafe, which ultimately proved unsuccessful. "I don't see this as a failure at all; it was a strategic channel that we used to grow our brand and investor base."

Mini-bonds

A mini-bond, which is a debt product that Lang describes as similar to an interest-only loan, is another option that's gained traction. In essence, an investor - or investors - would lend a business, say, £1m; the business would then pay the interest, which would be a minimum of about 7%, over the term of the lending and the original £1m at the end of the term.

"It relieves some of the burden on the company, which means they can invest more heavily in their business - in growth and expansion. Then when the business has grown and is meeting its targets and has expanded, it is in a stronger position to be able to repay the initial debt back," Lang explains.

Mini-bonds are most suitable for businesses that have been operating for a few years and are therefore financially stable and able to make regular repayments, like Mexican-style burrito chain Chilango, which in 2014 raised a record-breaking £2.1m with a highly successful mini-bond on Crowdcube.

This 'Burrito Bond' enabled the group to grow rapidly over 12 months, opening three new sites and creating around 40 new jobs. More than 700 investors put in a minimum of £500 each in return for an 8% pa interest payment over the four years of the bond.

Peer-to-peer lending

Peer-to-peer lending through marketplaces like Funding Circle is another way for businesses that are past the 'getting off the ground stage' to source investment. To qualify, businesses need to have been trading for a couple of years and have a turnover of £50,000.

The process is simple. "It's an online market- place. Businesses can go onto the website anytime they want and make an application in under 10 minutes. They should get a response within 48 hours on whether their loan will be accepted in the marketplace or not, and there should be funds in their account in under a week," explains Pam Burton, Funding Circle's UK chief operating officer. "It's really fast, it's really flexible and they can get the funds as quickly as they need to."

One success story is the Exhibition Rooms restaurant in Crystal Palace. The owners applied to borrow £36,000 to open their second restaurant and 763 investors from the Funding Circle marketplace put in money.

Cash advances

Business cash advances, which are repaid as a pre-agreed percentage of future sales, are becoming increasingly popular because of their flexible nature and the fact that the agreed repayment plan accounts for seasonal income variations.

According to Rob Straathof, managing director of business finance providers Liberis, it's a great option for pubs, bars and restaurants because there are times they are busy and times there are not. "That's why we link repayments directly to cash flow," he says.

One hospitality business that has seen success with Liberis is the Northop Hall country-house hotel and Chequers restaurant in Chester. Co-owner Charlotte Holland says: "Because payback is based on day-to-day trading, it has a much lower impact on our cash flow. And we can get funding during the quieter months when we most need it, knowing much of the payback will happen when we're in mid and high season."

Liberis offers cash advances of between £2,500 and £300,000 to businesses with a card machine and monthly card takings of at least £4,000. The average business is advanced £15,000 from Liberis, typically to fund refurbishment, stock purchase or expansion, which is usually paid back over seven to eight months.

Asset finance

For operators looking to obtain new equipment, asset-based finance, which involves paying a regular charge to use an asset over an agreed period, and which, according to Morgan, is an under-used source of finance, is a great avenue. It has certainly worked for Cornish Oven owner Giles Williams who has used asset finance provider Ignition to help purchase coffee machines, ovens, freezers and specialist catering vehicles, and to help fit-out the business's latest shop in Helston.

"I've found it to be good business practice as it forces you to focus on the equipment or vehicle you want and make sure it's absolutely right. Every new purchase is collateral on a loan, so it has to be justified and make financial sense," Williams says. "The process helps you make sure you get what you need rather than what you want."

Plus, by using companies like Ignition, as it the assets are paid for in instalments, the equipment helps to pay for itself.

Free finance Business Breakfast

The Caterer is hosting a free Business Breakfast event for casual-dining operators in partnership with Barclays to explore the future for the sector.

The event will take place at host partner Google's state-of-the-art Town Hall offices in London on the morning of 28 April, and will bring together experts from Barclays, Google and the hospitality industry to share exclusive data and insight into what will drive growth in 2016.

After a funding outlook from Barclays' Mike Saul and insight into digital trends in casual dining from Google's Harry Walker, a panel of leading operators will explain how they see the future for the sector.

The industry leaders include Ian Edward (Brasserie Blanc, Pizza Pilgrims, Hippo Inns), Sticks 'n' Sushi managing director Andreas Karlsson and Dishoom founder Kavi Thakrar. They will discuss their growth strategies and explain how they have built businesses for sustainable success.

Location

Google, 1-13 St Giles High St, London WC2H 8AG

Agenda

9am Arrival and networking breakfast

9:30am Funders outlook: Mike Saul, Barclays

9:35am Digital trends in casual dining: Harry Walker, industry head, Google

9:45am Panel discussion: Casual dining in 2016 - how to position your business for growth: Ian Edward, Brasserie Blanc, Andreas Karlsson, Sticks 'n' Sushi, Philip Richardson, Barclays, and Kavi Thakrar, Dishoom

10:45am Closing comments

Book your free place athere

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