In the money?

When taking on a new business it's essential to plan every aspect of your finances.

The start of a new year often acts as a catalyst for people to make changes to their lives - and this life change may be to run their own pub. The economic climate is certainly better than it was this time last year and the main stock markets are also showing signs of more confidence. This shows that larger corporates are seeing opportunities to expand and invest for the future.

As with any business proposition, you still need to make sure that you carry out all the necessary research to ensure that you have looked at every possible aspect of your business plan. The basic principles that one would expect to see in any business apply equally to a hospitality business and you must not get caught up in the romance of the trade. Remember that you are in business for the long term and you need to base your business on sound financial foundations and management.

It is a good idea to get your plans reviewed by someone already in the trade. One of the reasons why this sector has a reasonably high failure rate among start-ups is that new entrepreneurs overestimate the skills that they have and underestimate the amount of time and working capital needed to establish the business. Even large national high street players in this sector have been unable to foresee the changes in customer demand and have suffered in their businesses.

Finance is another key requirement for any business plan and there are investors and bankers that are currently willing to back the right opportunity. One of the main hurdles for entrepreneurs starting out in this marketplace is the lack of a proven track record. Their business plans have to be a better proposition than the rest, stand out and attract the interest of investors.

There are a number of ways of funding a new project. The types of funding very much depend upon the risk and the security available to the funders. For example, funding of equipment is relatively straightforward, as a lease option can be arranged.

The more difficult area to obtain funding is for your basic working capital needs if you are unable to provide any security to the lender. In these circumstances, you will need to fund this working capital with your own personal injections of capital or from other outside investors. The golden rule is always to try to match a particular asset with the correct type of funding.

For example, the cost of a lease premium would be well matched with a longer-term bank loan as opposed to a more expensive overdraft, which can always be called in. For an existing business it is often easier to raise finance to expand or to make improvements, as the business will have a proven track record.

However, there are still pitfalls. A pub that is looking to raise finance to improve its decor has to make sure that this is good business from a cost benefit approach. There is no point in raising the quality of the fixtures and fittings if this does not have the effect of attracting new customers or increasing customer spend.

When the new finance is for an expansion project it is very important to make sure that the expansion plans are well thought out and costed. A common pitfall for businesses that expand into new locations is that the management of the business is spread too thin and weakens the whole concept. It is therefore essential to have planned how the enlarged business will operate, perhaps with local management, and to make sure you understand why your existing customers value your current operation.

In conclusion, you should stick to the principles that apply to all good businesses by ensuring that all future plans are thought through in detail. And, when the business is up and running, ensure you have sound financial management in place and you will stand a much greater chance of success.

• Chris Lane is a partner at Kingston Smith, one of the UK's top 20 accountancy firms, and can be contacted for further advice on: 020 7566 4000 or clane@kingstonsmith.co.uk. Chris and his team specialise in providing business and financial advice to the hospitality sector.

Top tips for finance​

Paul Thompson, of Acorn Commercial Finance, looks at the best ways of overcoming these issues to help get your business off the ground:​

The bank is often the first port of call for funding: What many people don't realise is that most high street banks will only lend up to 60 per cent of the bricks and mortar value of the chosen premises. High street banks are not necessarily specialists in their chosen area of business. They may have arranged funding for one or two pubs, clubs or bars, but the likelihood is that they do not have an in-depth knowledge of the complexities of financing in this specialist sector.

It's also worth considering your credit rating. You may not think you have a problem, but in fact one in four adults in the UK today have some form of adverse credit. It may only be a late payment on a credit card, but to many high street lenders that makes you a no-go. That's 25 per cent of the population discounted before they have even begun to develop a business plan.

There are other pitfalls to consider too: Many finance sources will offer a loan over a 10 or 15-year term. While you might prefer to clear the loan over a short period, the cash flow of a business can be improved dramatically by spreading payments over a 20 or 25-year term. If payments can be increased over the minimum, it builds in the flexibility to pay the loan off over a shorter term.

Independent brokers have access to a wide range of funding providers, and are not linked to a specific lender or business transfer agent. Often, they can lend 100 per cent of development or refurbishment costs as well as a working capital allowance to get you through the vital early stages of setting up your business.

Until relatively recently the commercial finance sector remained largely unregulated now it is regulated by the National Association of Commercial Finance Brokers (NACFB). Members of the NACFB operate under an Office of Fair Trading registered code of practice, providing customers with added peace of mind.

• Acorn Commercial Finance was established in 1987 and is one of the largest independent commercial brokers in the UK. The company is a full member of the NACFB and specialises in securing funding for businesses in the leisure, hospitality and care sectors. Paul Thompson is a Partner in the firm. See www.publoans.com