Hospitality funding: Specialist lenders

According to a survey carried out by accountancy firm RSM Tenon earlier this year, 47 per cent of businesses in the hospitality and leisure sector have looked for additional sources for funding to help them expand because they had been refused by the banks. 

It’s perhaps no surprise then that we are seeing a rise in the number of lenders who specialise in the hospitality sector come to the market with the intention of helping hoteliers pay for refurbishments or restaurateurs invest in new kitchen equipment. 

This year at least two new lenders – Boost Capital and Ashley Business Cash - have launched in the UK with the intention of helping the hospitality sector access capital, while existing lenders in this area are seeing a rise in the number of business owners knocking on their doors. 

“We’ve seen a large increase in both the number of applicants applying to us for funds to start-up a new a new restaurant, brasserie or steakhouse and improved confidence in existing operators expanding into their second, third, or more eateries in the last couple of years,” says Richard Hamlin of First Merchant Direct which specialises in granting loans on short leasehold businesses. 

The rise, he believes, is a result of banks tightening their criteria for lending, which means many smaller businesses don’t get a look in: “It is very difficult to raise finance to purchase a restaurant or hotel in the current climate unless the unit is at the top end of the market, the prospective borrower has a good track record and can invest a high percentage of the purchase price from his own resources,” he adds. 

Business cash advance​

Boost Capital launched in the UK earlier this year with 11 years of experience in the US market where 40 per cent of its clients are in the hospitality sector. 

It expects to lend at least £10m to UK businesses in the coming year to help them grow, or just help them improve the existing business by buying new stock, investing in new equipment or refurbish bedrooms. 

The company’s lending works by giving a business an advance sum of cash for a fee, which is then paid back through future credit and debit card sales. The main lending criteria is that a restaurant, hotel or pub must process a minimum of £3,000 in credit and debit card sales a month. 

“Essentially we provide businesses with a lump sum of cash that they pay back via transfer of a fixed daily percentage of credit and debit card sales until we get back the advance and our fee,” says Boost Capital’s UK managing director David Abbott.

 “If the business has a good day, it pays back more, if it is a slow day or month it pays back less. The business owner can use the funding for whatever they wish, including new stock, refurbishments, expansion and marketing. There is no fixed term, no APR and no late fees or penalties.” 

A similar principle is applied at Ashley Business Cash, a Manchester-based firm, which was officially launched last month to provide businesses in the hospitality sector with cash injections of up to £25,000 based on future sales. As with Boost Capital, clients make repayments through debit and credit card sales. 

Colin Samuels, its managing director says: “Many bonafide hospitality businesses are coming under increasing pressure and, whilst the Government is doing its bit to try to help, business owners are still finding it difficult to access funds. 

“In response to this, our sister company, Ashley Commercial Finance Ltd, recognised the need for an alternative solution and that is where the idea for the new business came from.” 

Both lenders say they see themselves as an antidote to so-called ‘pay-day loan’ companies who give cash advances with high rates of interest attached. However, with any form of lending it is wise to check contracts before signing up and seek professional legal advice if there are any doubts. There could be little point if the investment would not ultimately benefit the future of the business. 

Boost Capital for example has contracts to protect its interests, but also gives contracts to each client to consider before agreeing to the loan. “Contracts are provided early in the process to allow the business to consider the terms, and take professional advice if required.” 

Expansion plans​ 

Lenders like Boost Capital and Ashley Business Cash may be an option for businesses looking to invest in an existing site, but if your current site or sites are a success and the only way you see the business growing is by opening another, where do you go if the bank refuses to give you a loan or you don’t have private investors interested? (we’ll be looking at private investment tomorrow). 

Family-run company First Merchant specialises in lending money to companies within the hospitality sector who want to acquire the lease on a building and over the last 17 years has granted loans to numerous companies to do just that. 

Those it has helped include an established chain of London-based Italian restaurants who wanted to put down money on a new site quickly to secure it and a relatively new steakhouse group who needed £250,000 to buy a 21-year lease for a new site when the opportunity arose. 

“We have found that despite high rents, buyers realise that it is more viable to acquire a lease than try to raise enormous sums of money to buy a freehold and service such debts,” explains First Merchant’s Richard Hamlin. 

Loans granted by First Merchant are typically paid back during a period of between 12 months and five years. The company employs an independent surveyor to carry out a business valuation before agreeing a loan and its terms, but says there are few companies it will refuse to finance, which is in contrast to the current view of many banks. 

“We are able to lend to virtually any business in retail, catering and leisure which is good news for the marketplace,” says Hamlin. 

Whatever option you decide to take and no matter how easy it may appear to be to gain funding from alternative sources, before taking that loan, remember it has to work for the business going forward. 

"As always, business owners should consider all options before choosing a funding line that is right for them. One that achieves the short-term objective without creating a long-term business killing liability, in the event that market conditions change," warns Abbott.

To view all of our articles on Funding Hospitality click here​.​