Growing a hospitality business with finance

Hospitality businesses tend to need finance for a familiar set of reasons. Kitchens wear out, dining rooms need refreshing, a second site comes up, or a quiet season stretches longer than planned. The sector also has characteristics lenders look at closely, such as tight margins, seasonal trading and a reliance on card takings. Understanding how those factors are viewed makes it easier to find finance that fits.

Matching the finance to the purpose

Different needs suit different products, and using the right one usually makes repayments easier to manage.

• Kitchen and bar equipment. Ovens, refrigeration, coffee machines and cellar equipment are often funded through asset finance, where the equipment itself supports the borrowing and repayments are spread over its working life.
• Refurbishment and fit-out. A term loan, secured or unsecured, is a common choice for work that improves the premises but doesn’t create a separate asset a lender can take back.
• Seasonal cash flow. A revolving credit facility can cover quieter months and be repaid when trade picks up.
• Card-heavy takings. A merchant cash advance is repaid as a share of future card sales, so repayments rise and fall with trade. It can be convenient, but the total cost should be compared carefully with other options.
• Buying the freehold. A commercial mortgage can help an established operator buy their premises or a new site.

What lenders tend to focus on

Lenders will look at the usual things, such as trading history, accounts and bank statements, but a few points carry extra weight in hospitality.

• Consistency of takings across the year, and how the business handles its quieter months.
• Gross margins, especially food and drink costs, and how they have held up as supplier prices have changed.
• The lease, including how long is left and any break clauses, since a short lease can limit how long a lender is comfortable lending.
• Licensing and any compliance history.
• The experience of the operators, particularly when opening a new site.

Preparing a growth plan

If you are borrowing to grow, set out the plan simply. Explain what the money will pay for, what difference it will make to covers, average spend or capacity, and how the extra income will repay the borrowing. Be realistic about how long a refurbished room or new site takes to reach full trade, and show the lender that the existing business can carry the repayments in the meantime.

Up-to-date management accounts help a great deal. A lender who can see the last few months, not just last year’s filed accounts, has a clearer picture of how the business is trading now.

Timing matters

Many operators plan refurbishments for the quietest part of the year to limit lost trade. That makes sense operationally, but it also means applying for finance at a point when takings look lower. Starting the conversation a few months earlier, while trading figures are stronger, gives more room to compare options and complete the process before work is due to start.

A specialist broker familiar with hospitality can help you understand which lenders are comfortable with the sector and which products suit your plans, before you commit to a particular route.