Unless you’re a lottery winner financing a small business, such as a pub, has always been a challenge and none more so than in recent years. With the global economic downturn and the special difficulties facing the UK pub market finding sustainable financing for your pub may be difficult, however, it’s not impossible.
In this guide I’ve brought together much of the current thinking about how to secure the funding you need and whilst it may not be suitable for many tenanted or leasehold pub businesses the fundamental principles remain true.
As with all finance oriented information on this website, the following guide comes with my strongest recommendation to seek independent, professional financial and legal advice before entering into any loan agreement or property transaction.
No doubt you will have read elsewhere of the litany of “we’ve got a really good idea for a pub, but the banks just aren’t lending…if only we had the money ourselves” you may even be thinking this yourself.
The financial press is full of stories about improvement in the financial markets, the government is telling us the economy has turned the corner out of recession and there are even positive noises emanating from the pub trade that “things are on the up”. However, despite these encouraging signals, high street banks do not appear to have received the message especially if you’re a start-up and even more so if you’re start-up is in hospitality.
Seed Enterprise Investment Scheme (SEISP)
If you’re just starting out in business you might consider the SEISP. This government backed scheme lets those investing in businesses with up to 25 employees raise ‘equity finance’ by offering tax relief to individual investors. The downside is the process can be longer than standard commercial routes and a lot more bureaucratic.
Enterprise Finance Guarantee (EFG)
Another government measure, the EFG might be suitable for those who’ve been turned down for a commercial loan due to having no ‘collateral’ and/or no proven track record. Again the downside is the time it might take and the miles of red-tape. Use of the EFG scheme is limited as the deal has to fit into the lender’s normal criteria except for one or two minor points (normally a small shortfall on security). Lack of experience would normally be a killer here.
Private Equity Funds (PEF)
Although probably not suitable for financing individual pub businesses a PEF may be useful for those of you looking to expand your business to become a multiple operator with your own estate of pubs. The downside to this kind of investment is PEFs will want a sizable chunk of ownership of the business and will be much more ‘hands on’ than, say, a bank in the operation of your business.
The High Street Banks
Whichever avenue you explore in your search for business funding all the experts agree the fundamental point that preparation of a comprehensive business plan and a demonstrable strategy of how the funding would be used to grow the business is essential.
In essence, all business is a ‘numbers game’ and no matter how slick your marketing plan, unique your offering or how much passion you demonstrate for your business idea lenders are really only interested in three things:
- Is there collateral for the loan?
- Will the business be able to afford to make the repayment of capital invested?
- Will the business be able to afford the interest on any loan made?
Your financial projections have to be spot-on, clearly thought through and able to show growth in profitability from the outset. You’ll need to be able to show what monies you’ll put aside for growth and as a buffer against the inevitable downturns all businesses experience from time to time.
Lenders have Key Performance Indicators (KPIs) they use to decide if a business plan and funding proposition can sustain the financial support you are seeking: gross margin, gross profit, key overhead figures such as rent/mortgage/wages/cost of supplies etc. The ‘suits’ will want to hear from you how you’re prepared to reinvest your share of profit into the growth of the business, so you have to ask yourself whether you’re really prepared to make a long-term commitment to the business and more often than not the necessary personal sacrifices many successful entrepreneurs make. We’ve all seen the way otherwise convincing business pitches fail on “Dragon’s Den” due to the lack of a sound financial presentation. All lenders will think and act the same way and before you know it they’ll “be out” and your one shot at convincing them to lend you money will over and you generally only get one chance.
The level of funding each business requires is unique to that business and depends entirely on what type of business you are starting up or expanding. For instance a small back-street community pub will usually cost a lot less to finance than a sprawling country pub with acres of beer garden and a dozen letting rooms. Fitting out a brand new kitchen and dining area for your ‘gastropub’ concept might cost as much as the entire entry costs for a traditional pub tenancy.
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