Gone are the days when notes on a napkin and an expensive bottle of wine over lunch were all you needed to secure a loan. In 2012 the banks' default position is "No", unless you meet an extremely stringent set of criteria, as Elly Earls discovers
Only five years ago, banks were lending as much as 85% of the going-concern value of a property, or 100% of the underlying property value. Come 2012 and you'd be lucky to get 65%.
"Back in the heyday, banks wanted to lend money," says Simon Chaplin, head of restaurants at Christie & Co. "But now they will only do so if you manage to tick every box."
"‘No' is the instinctive reaction," agrees Simon Hall, head of pubs at Fleurets. "It's about finding reasons they shouldn't lend rather than supporting a client or an operator and developing a business."
For many prospective purchasers, this has meant seeking out alternative funding options. "Not all banks are keen to lend in certain segments of the sector," explains Sean Ludden, a director in Colliers International's licensed and leisure team. "So in order to obtain new finance or to re-gear on fresh terms, borrowers often have no option but to seek a new loan elsewhere."
Friends and family, websites focused on collectively raising equity for businesses, and high-net-worth individuals are therefore becoming much more common sources of funding, particularly for early-stage businesses.
"There are two reasons creating this opportunity," says Mark Sheehan, managing director of Coffer Corporate Leisure. "One - it's more difficult to get debt funding. And two - people who have got cash are not getting any interest on it if they put it in the bank; therefore they're much more likely to invest in a business where they might get better returns."
That's not to say it's impossible to secure bank funding for a new site; you just have to make sure you meet the bank's criteria. "If you've got a good bit of experience and you're looking at a business that has accounts, you've got a reasonable chance; as a general rule of thumb, you'll be able to borrow 50-60% of the purchase price," Hall remarks.
But don't forget to do your homework. "Banks in general like to see steady, profitable and robust businesses run by experienced operators who have been able to prove sustained profits over at least three years," Ludden elaborates. "Banks may look for a minimum EBIDTA (earnings before interest, taxes, depreciation, and amortization) cover of two times the repayments.
"Of course, each bank has its own lending criteria, but debt finance is tightly controlled and money lent only to those businesses that can generate sufficient EBIDTA to comfortably repay its debt and leave a reasonable return for the borrower."
A realistic, robust, transparent business plan is also an absolute must and, according to Santander, should include the following:
â- Markets and competitors: the segments of the market the business targets - for example, local customers or a particular age group;
â- Marketing and sales: pricing policy, promotion, sales channels and so on;
â- Management and personnel: people reading the business plan need to be given an idea of why they should have faith in the management of a particular business;
â- Operations: an explanation of the facilities the business has and how it delivers the product or service to the customer;
â- Financial performance: a translation of what has already been said about the business into numbers;
â- Financial requirements: the cash-flow forecast will show how much finance the business needs;
â- Risk assessment: it is essential to isolate areas where things could go wrong.
For larger developments such as a new hotel or a 50-bed hotel extension, it is also usual for banks to require a feasibility study, asking questions such as: Can these rooms be sold? To whom? At what average room rate? What are the associated costs with these new rooms, and how will your profit increase?
Moreover, banks are increasingly taking into account the property value, as well as the ins and outs of a business. "It might be a brilliant business, but if it's only a tin shed, it isn't going to get very good lending, even if the borrowers can afford it," Chaplin says.
For this reason, leaseholds can be very difficult to fund, in comparison to freehold properties. "While it is not possible to make a sweeping statement for all banks, funding for leasehold businesses can be even more difficult because there may be no tangible property asset left to sell in the event of default," Ludden explains.
There's no doubt that securing a loan is much more difficult now than it was five years ago, but it's by no means impossible, Ludden is keen to emphasise. "If you research your market, write a professional business plan and, when interviewed by the bank, come across as a credible and therefore creditworthy business operator or prospective purchaser, there is money out there for you," he says.
Indeed, the Colliers International licensed and leisure team has undertaken numerous valuations since the beginning of the year, where a number of banks were looking to support both new and existing customers in developing their businesses, by providing additional or new debt funding. And Davis Coffer Lyons has witnessed a similar increase in valuations. "The work our valuation team has been doing has risen enormously over the past six months," Sheehan concludes. "It's still tough but the door is opening a bit."
Evolving to meet customer demands
Earlier this year Ayrshire hotel and resort Seamill Hydro managed to secure a £3m refinancing agreement with Santander Corporate Banking.
As a result, the hotel, which has been owned and operated as a partnership by two generations of the Sweeney family since 1985, unveiled its new restaurant, the Orangery in June. Furthermore, the new finance will allow Seamill Hydro to continue its extensive refurbishment programme, providing working capital for further improvements.
Over the years, the hotel's owners have rejuvenated the business, transforming it from a neglected 40-bedroom hotel into a bustling 94-bedroom resort, attracting a wide demographic of guests from both the UK and abroad, and it was partly this dedication that won Santander over.
"They have worked extremely hard to transform it into the hotel it is today," says Peter Anderson, relationship director at Santander Corporate Banking. "We are delighted to have been able to support the Sweeney family with the refurbishment of what is already a lovely hotel.
"The business appealed to us because they have the customer at the heart of what they do and have constantly evolved and improved with the times to meet customer demands. We are confident that, with our ongoing support, they will be able to make all the improvements necessary to keep the hotel at its high standard."
the ‘computer says no' attitude
Richard and Rebecca Robinson took over the White Horse in Haselbury Plucknett, Somerset, in April, having secured bank funding despite the fact they had never owned a business before.
Richard had previously been the executive head chef at Harvey Nicholls Prism restaurant and was at the time executive head chef at Racines in Knightsbridge. But Rebecca recalls that it certainly wasn't easy. "Our first meetings with the banks were very disconcerting, with the ‘computer says no' attitude after our presentation," she says. "It felt very much like they were simply going through the motions."
The couple then spoke with a few brokers, who were extremely sceptical, and were beginning to give up, until they found Roger Schooling, owner of Business Mortgage Solutions. "He gave us some confidence and managed to get our presentation into the hands of the right people at the banks," says Robinson.
"Despite the feeling that banks are not lending to the pub and restaurant trade, two high-street banks were prepared to offer funding," Schooling notes. "Although Richard and Rebecca had never actually owned a business before, a meeting with the bank manager, backed by impressive CVs, soon identified them as people the bank should be dealing with."
The Robinsons had also prepared a comprehensive business plan clearly outlining their intentions.
"This included their business idea, where they saw themselves in three years, their unique selling point, their marketing plan, and competitor profile," Schooling says. "In all, from the original application for funding through to completion of the purchase, the timeframe was around 10 weeks."
five tips for securing finance
1 A business plan is absolutely essential. This should include financial projections based on revenue forecasts and key performance indicators (KPIs), gross profit margin, wages, utilities costs and sustainable levels of EBIDTA. It should also present a detailed sensitivity analysis on these KPIs, which looks at the effects of flexing the projected turnover by +/-5%, 10%, 15%, and 20%.
2 Make sure there are no irregularities in your accounts. Banks are looking for clear, precise, unambiguous figures, so ensure that there are no anomalies in your trading accounts and that everything is very straightforward. Accountants may also have to confirm that all tax, VAT and PAYE is up-to-date.
3 Communication is key. When choosing a broker or a bank, make sure they will liaise with everyone involved - the buyer, the seller and the agent. Also remember to take into account whether a broker charges up front or only on success.
4 Remember that lenders are increasingly taking more than just the details of the business into account. Make sure your property doesn't have any major issues; the uncertainty of how much it will cost to put something right might be a turn-off for a bank.
5 It's not impossible to secure lending even in these challenging times, particularly for freehold properties. Take the time to tick all the boxes the bank requires and you'll have a reasonable chance of securing 50-60% of the purchase price.