Creative Finance


Following a long period of recession the good news is that the economy is beginning to recover. But is that going to help licensees raise capital for their businesses? Jamie Allan reports.

One of the biggest bug bears for the licensed trade, and indeed many businesses, over the last few years has been the difficulty that owners have had with regard to raising finance, either to refurbish their venues or to expand their businesses by buying new premises, while others have struggled just to stay afloat. The biggest complaint has been the failure of banks to support the trade. But it appears that the purse strings are loosening and there are also various other types of finance available for licensees willing to explore a bit.

One company encouraging business owners to consider alternative funding options is Acorn Commercial Finance, a financial broker who specialise in the hospitality industry. DRAM spoke to Partner Paul Thompson, who told us, “High street banks don’t have to try hard because business just walks in the door. Two-thirds of small business owners looking for finance start and stop at their own bank, which is pretty shocking. I can’t stress enough the importance of business owners looking at different rather than traditional sources of funding, such as private equity funds, brewery finance, pension scheme funding and small business loans to name but a few – we have approximately 150 different lenders on our records. The bank is only ever thinking of what is best for the bank itself. We help our clients choose a path and help them look to the future.”

Another company that provides alternative funding options is Liquid Finance, who specialise in financing small businesses looking to either refurbish their existing premises or become a multiple-site operator. Director Richard Morley comments, “We are always looking to help businesses expand on the basis of future cash flow. If you have a successful business and are looking to renovate or expand, we help unlock potential capital by funding against existing debit and credit card payments.”

In essence, this means that Liquid Finance will provide capital to a business based on existing credit card sales. If a bar takes £20,000 per month in card payments, for example, Liquid Finance will advance that amount to the business and take approximately 20% off the daily card payments from there on in until the money and rates are repaid. There are no set times for repayment, though typically it can last from between six to eight months.

First-time operators, of course, have no such access to current cash flow, and the broad consensus amongst those DRAM spoke to was that it remains extremely difficult in the present financial climate for new businesses to secure funding. Stewart Hindley specialises in raising finance in the Hospitality sector says the company’s Chris McDonagh, another specialist finance company, “Our clients generally find us either through the web or by referral, and we offer to secure the debt for them. We’ve certainly seen a change in our clientele in the last four to five years. It used to be primarily new-to-trade operators, and now it’s a 50/50 split with existing operators.

He continues, “It’s not all doom and gloom for those setting up new businesses however. So long as the business plan is strong enough and you have enough initial capital then you will definitely be considered. I would advise people not to go into it with rose-tinted spectacles. You have to look at it through the banker’s eyes: is it bankable, will it trade at a profit and service the debt? If so, we can help get the deal away.”

Acorn’s Paul Thompson agrees that while it’s certainly still difficult for first-time operators to get off the ground it’s by no means impossible provided expectations are realistic. He said, “The main lenders will generally expect 35% capital as well as provable experience, which can make it difficult for prospective first-time operators to secure the funding they need. We do help those new to ownership of course, but there are an awful lot of people chasing dreams; it’s up to us to point them in the right direction and offer realistic opportunities.”

But what if new businesses could simply bypass lenders altogether? One alternative source of funding that has caught the public’s imagination in recent times is crowdfunding, a predominantly internet-based phenomenon that allows business owners to raise funds from a multitude of people each contributing a small sum of money. In return for their contribution, investors receive anything from special offers and free gifts to actual equity in the business.

There are a variety of crowdfunding companies in operation, such as BankToTheFuture, Squareknot, Bloom and Angels Den, all operating from an online platform. Typically, the business applying for funding will be required to provide a pitch for potential investors to view, as well as setting a financial target to be reached within a set time limit. Should the money raised fall short of that target then the investors will have their money returned to them. If the fundraising is successful the host site keeps a small percentage of the funds with the remaining amount going straight to the business. Angels Den, for example, take 5% of all successfully raised funds as well as a £1,600 admin fee. There is no charge should the business fail to reach its target.

BrewDog’s much-publicised Equity For Punks scheme is undoubtedly the trade’s most successful example of crowdfunding, with the company using the generated funds to expand their bar operations across the globe. It recently raised an additional £4.25m taking their overall crowdfunding investments to in excess of £7m and total equity investors to over 14,000 people. As well as a share in the business, investors also receive a lifetime discount in the brewer’s bars and shops.The company may have started out as a craft brewer but its crowdfunding allowed it to expand into the pubco it now is.

A primary reason that BrewDog was able to attract such substantial investment was that the business was already well-established and had developed a loyal following amongst the drinking public; the chances of a first-time bar owner being able to raise such substantial sums of investment through crowdfunding is practically nil. However the opportunity remains for new businesses to take advantage of the crowdfunding phenomenon.

One recent success story is Mr C’s, a cocktail bar in Thurso that took over a closed-down community bar after successfully raising £20k through shared equity fundraising via BankToTheFuture. Owner Simon Collier told Dram, “Having moved up north from Gloucester with my parents, I went on to work in pretty much every bar in Thurso and was waiting for the opportunity to start a venture of my own. I was aware that the lease was coming up on a site that wouldn’t be renewed, and I thought it would be perfect for my concept.

“Credit was my biggest problem, in so much as I didn’t have any. The banks just laughed me away. However my brother worked in crowdfunding, and so I decided to give it a go. It worked incredibly well, as word spread and more and more people got involved. Being a small community was a huge part of the success, there’s now nowhere I can go in Caithness where people don’t know my face. It was a lot of hard work, doing the legwork, meeting people, explaining and discussing my concept and gathering support, but eventually we succeeded in reaching our target.”

Simon combined the £20k raised with a further £4k of his own personal savings before returning to the bank. “They saw the investors’ commitment as evidence of sufficient interest in the business to make it succeed, and so decided to lend me a further £5k, giving me a grand total of £28k. Three months after beginning our crowdfunding campaign we had the keys to the premises.”

The success of BrewDog and Mr C’s may serve as an exception to the rule however. Alex Nunn, Marketing and Support Manager for Angels Den, told DRAM that crowdfunding will only really work if the business already has an established database of contacts. She said, “If you don’t have your own contacts then crowdfunding on its own won’t work – you need that bank of people to pitch to. It could be family, friends, colleagues or professional contacts, anyone who would be happy to support you.” For those lacking a large list of known contacts Alex suggests Angel funding, a form of crowdfunding in which people pitch to Angels Den’s 6000-strong database of private investors. The company also host monthly SpeedFunding events, a twist on the speed dating format which allows businesses to pitch to multiple potential investors over a short period of time.

Perhaps a more affordable option for prospective first-time owners remains the opportunity to take up a lease with a major pub group such as Punch Taverns, Star Pubs and Bars or various others. With lessees generally tied-in to existing suppliers and contractors, it does provide a low-cost (and lower-risk) entry into the world of pub management for the first-time operator. Star Pubs and Bars, for example, offer an entry price of £10k with a flat £3k deposit as part of their ‘Business Start-Up Agreement’, as well as a contract that can be terminated by the lessee at any point with three months notice. Financial support packages are also available, in particular for bars in need of financial assistance in their first year of operating, and cash bonuses are awarded to successful operators.

Chris Jowsey, Trading Director of Star Pubs and Bars, said, “At Star Pubs and Bars we believe the key to attracting and retaining lessees is for them to have both a successful pub business and a strong partnership with us where we can be seen to be adding value. To that end we provide support to help our lessees grow their businesses and reduce their costs and are always looking at new ways in which we can refine and improve this help.”

Yet just as some operators look to bypass the high street banks when sourcing funding, a new tenancy option has arisen that provides potential lessees an alternative to the major pub groups. Steve Graham, Managing Director of Manorview Hotels and Leisure Group, has launched his own pub estate business, Manorview Pub Partnership, that he says provides a major point of difference from the mainstream alternatives. The company will be managed by Mark Hannah, previously of Belhaven. Steve told DRAM, “We are looking for pubs to purchase as well as pubs to invest in, and are introducing what we believe is a fresh business model to the licensed trade.”

He continues, “We see a gap in the market for a pub company that treats tenants more as business partners. All of our tenants will have the opportunity to purchase at a pre-agreed date. This means the people who put the effort into growing their businesses will reap the rewards, whilst allowing Manorview Hotels and Leisure Group a return on our investment. We want to help operators invest in their businesses – and we can do this by helping with refurbishments as we have our own property development team responsible for developing our hotels at the moment. There will also be a benefit to tenants from the buying power and expertise of the Manorview Group. We have money to invest and there are lots of opportunities out there that just need some investment and support. We want people to say that Manorview Hotels and Leisure Group are a good business partner that is unique to the license trade.”

Even with the large range of alternative finance options available it’s important to remember that traditional bank lending remains a more than viable option to many operators. Despite the negative reputation that high street banks have attained following the financial crisis of 2008, as well as the broad perception that they have done little to help the hospitality sector since, opportunities remain for established operators to secure bank funding.

Paul Smith, Corporate Development Director, Barclays Corporate Banking, told DRAM that despite the recession, Barclays’ approval rates for hospitality and leisure businesses have remained constant over the last ten years. Paul describes bank funding as the ‘reliable option’, and he provided a brief guide to the key indicators that Barclays look for when assessing a potential loan.

Says Paul, “There is no ‘one size fits all’ guide as lenders evaluate a business on it individual merits but there are some essential steps that will help ensure success. An early approach is vital to give banks the time needed to make an informed decision but before this even takes place operators need to ensure a solid business plan and a credible management team are in place.

“Borrowers need to help the bank understand the business’ historic and current performance as well as using comprehensive forecasting to map out future plans. Profit and loss and balance sheets are, of course, important but a lender’s key focus will be on the business’ cashflow and risk profile. Failure to evidence careful cash flow management is the single biggest barrier to successfully securing funding in any sector.

“Provide your bank with comprehensive management information including financial metrics and operational measures used for day-to-day decision-making. Profiling the commitment, motivation and enthusiasm of the management team will also do a lot to reinforce the company’s qualities and strengths.”

There exists a broad range of financial options for prospective and existing business owners to explore. Taking Paul Thompson’s example of the small business owner who begins and ends his search for funding with the high street banks, W.E. Hickson’s immortal proverb springs to mind; if at first you don’t succeed, try, try, try again!