Funding advice: Are we 'in the money'?

After years in which the credit crunch virtually froze investment to smaller businesses, brokers and property agents are noticing a thaw in attitudes from high-street banks.

Secondary lenders off the high street, are also active, along with brewers. Add to that the new phenomenon of crowdfunding, and the options for raising cash, to buy a pub or develop an existing business, are certainly expanding.

But the financial crisis has left its mark. Lenders continue to be cautious, and you’ll need to demonstrate a cast-iron case that you’ll be able to pay them back.

Market change

Simon Hall, head of pubs at licensed property agent Fleurets has seen a change in the market for funds.

“High-street banks have not been playing ball for a few years, but there is more willingness to do a deal now, led by NatWest, Barclays, Lloyds and Santander,” he says.

“We’ve also got secondary lenders — firms like Shawbrook and Commercial First — acting like banks, offering something like 60% of the purchase price of a freehold.

“Leaseholds are still extremely difficult to finance but, if you’ve got a proven, profitable business, you can raise funds against that and get 50% of the valuation of the pub.

“If you’re perhaps 10% short of what you need you can get a top-up brewery loan, going to Carlsberg or Heineken UK for instance, and agreeing to buy their beers in return. But if you only need £5,000 you’re probably better off with a business overdraft.”

Background needed

“Secondary lenders became the norm when getting a deal post credit crunch was almost impossible,” said Steve Chester at broker Axis Commercial Finance. “But now the high street is coming back.

“Typically, you can get bank finance for 60% to 65% of the value of the property over a 15-year term for between 2.5% to 4% above base rate interest.

“Without some relevant trade experience, though, you’re pushing uphill,” he adds. “You don’t necessarily have to have run a pub, but you do need a hospitality background.

“Accounts information and projections are also essential. You need a good back story, plans and forecasts for the new business.

“If it’s an existing pub, you should set out how you’re going to change it and how the loan will enable you to do it — without the business suffering while you’re carrying out the refurbishment.

“Most importantly you need to present all that in a way that will encourage people to buy into the idea. Banks will be seeing a lot of applications and you have to stand out or you won’t get off first base.”

Key questions

For Paul Thompson, director at broker Acorn Commercial Finance, doing a deal boils down to two simple questions from potential lenders: how will they get their money back, and what happens if it all goes wrong?

In particular, they’ll be asking:

• Do we have a trading history for the previous owners? Were they successful?
• Are we reliant on projections for the new owners to break even? Is there a back-up cash flow we can rely on until the pub is profitable?
• Can the applicants demonstrate success in a similar business? If not, do they have transferable skills and experience?
• Are they up to date with other mortgages or rent?

“If not, we can look at mitigating circumstances and work with more flexible funding sources who take a real world view,” says Thompson.

“Beyond these questions, different lenders see the licensed trade as more or less risky. As a broker our expertise lies in matching a prop-osition with funding that offers the best possible rate of interest.”

Secondary lenders

Karen Bennett, sales & marketing director for commercial mortgages at Shawbrook, views the pub market from the point of view of a secondary lender​

“While the pub industry is notorious for its ups and downs, it remains an interesting sector. If the formula is right, business owners can make strong returns,” she says. “We believe the pub market will continue to grow and we’re keen to support experienced publicans write the next chapter of their story by helping grow their business.

“We always approach a funding decision on a case-by-case basis, getting under the skin of a business and getting a true understanding of the financial strength of the client and, most importantly, their sector experience.

“For example, should a tenant in a pub be given the opportunity to buy it, we’d only lend to them if they’d been running it for at least 12 months. Closed pubs remain a challenge because it’s difficult to show that positive track record.

“But by taking a personalised approach, we’re often able to assist someone who wouldn’t have ticked the usual boxes.”

Brewery loans

Loans from brewers, usually tied to buying a certain amount of beer from the company, continue to be an important source of funding for publicans.​

And the prospect of the market rent-only option becoming a statutory element in lease agreements is encouraging the likes of Carlsberg UK to increase their activity in the market. Already 20% of its free-trade customers have taken out a loan with it.

Promising a straightforward process with a quick turnaround, Carlsberg will typically invest against future beer volumes purchased through the company or in return for an agreed repayable interest rate.

Free trade and wholesale sales director Rob Sandall describes the approach as “a strategic partnership”.

“The investment we provide is used to help businesses invest in amenity, buy additional new premises or engage in marketing activity.

“Any customer taking investment from us has the support of a dedicated investment manager who conducts the necessary due diligence, business reviews, investment cases and ongoing support. In fact we’ve had these teams in place for many years.

“We know the pub industry, and we’re quick and responsive at a time when speed is crucial. And we see further opportunity with pubs choosing the free-of-tie option and seeking partners to help establish and grow their business.”

Second purchase

Ian Richardson purchased his first freehold from Enterprise Inns​ in 2011 and recently returned to Acorn Commercial Finance to help acquire another pub that had gone downhill, closing in 2014.

He had previously leased the pub, knew its clientele and was confident in his ability to relaunch the business.

By remortgaging his other pub to release a deposit, Acorn was able to finance 100% of acquisition costs, completing within five weeks of agreeing the price.

Proven plans

Lesley Shearer was running the hospitality arm of an art gallery​ when she decided to buy the freehold of the Talbot Arms in Lewisham, south London, earlier this year.

Because she had relevant experience and a clear business plan, Axis Commercial Finance was able to offer her several funding options.

She went for a 15-year loan from Barclays that was enough to not only buy the pub but finance an upgrade.