There is no doubt that finding finance to start or grow a business within the hospitality sector has been tough over the last five years, particularly for new concepts with little experience of the market.
When we question new and seasoned operators about the growth plans for their businesses, often the reply is ‘we’d like to, but the banks just aren’t lending’, or ‘we don’t have the capital available to take the risk’.
But every day on BigHospitality you’ll also read about those who are succeeding, whether it’s a restaurant chain’s ambitious expansion targets, a chef who is about to turn a run-down pub into a new gourmet hotspot, or a hotel general manager’s intention to create the next boutique hotel chain. So is it really that difficult?
“I think over the last couple of years restaurants generally have held firm, for hotels it has been a little trickier and it’s been especially tough for pub and nightclub operators, but it has not quite been the apocalypse we thought it would be,” says Sam Fuller, managing director of Altium Capital, who has advised companies such as La Tasca, Prezzo and Luminar among others.
“Leisure is still a better place to be than retail. People still treat themselves to a bite to eat or go out for a drink or two.”
“The market is definitely becoming more liquid,” adds Justin Randall, a partner at accountancy firm Jeffreys Henry. “Over the last six months we have certainly seen more operations opening.”
How to secure funding
So with finance experts making more positive noises about the state of the market, the important question is how can you be like those who have gained the capital to grow and improve your chances of securing funding?
Despite improvements, the high street banks may still not be the best port of call, particularly if you’re a start-up, says Fuller.
“The banks say they are lending again, but if you’re a smaller business getting bank funding is going to be a challenge and I don’t see that changing in the short term,” he says. “Banks lending to consumer-facing businesses is less likely to happen, but if you’re a large chain you’re in a good position to be able to grow, because there is evidence that money is coming through, which is what the banks look for.”
“Traditional bank funding is a much tighter market than it was a while ago,” agrees Randall who suggests new businesses take advantage of Government initiatives such as the Seed Enterprise Investment Scheme (SEIS), which enables investors in businesses with up to 25 employees to raise equity finance by offering tax relief to individual investors.
“The SEIS is proving a very popular way for people looking to start up a restaurant or other leisure business who haven’t got the equity and are going out to friends and family to raise money. It’s very tax efficient for investors.”
Randall also suggests the Enterprise Finance Guarantee (EFG) for businesses that may have been turned down for a commercial loan because they couldn’t secure it or had no track record, while Fuller suggests that private equity firms could be an option for some operators who are already established.
“Private equity through the business growth fund is not the same as the bank, in that they’ll want a slice of the equity, but that sort of money is available as we’ve seen with a number of cases recently,” he says.
Other options, which we’ll explore over the course of this week on BigHospitality, include raising capital through crowd-funding, securing a loan through specialist lenders or even drawing on your own resources to set up your business.
Be prepared
Whatever route you decide to take to secure funding, both our experts believe it is essential to prepare a business plan and show clearly how the funding would be used to grow the business.
“It’s a numbers game,” says Fuller. “Operators might be very good at describing their brand and what they want to do with it, but it’s often the numbers that need a bit of work.
“Your financial projections have got to be nailed down and have got to be well-thought through. Anyone looking to lend will be looking at bottom line growth. “
Randall says his firm will often study a business at the stage where they have a business plan and then advise them accordingly.
He says: “We look at their KPIs and can pin point whether their business has got some holes in it or whether the margins are unrealistic.
“It is ideal to do this before you go to any potential funder. You only get one shot at it, so if your business plan has holes in it they won’t bother to go any further.”
And once you have the funding secured, use it wisely says Randall.
“If you’re an entrepreneur starting up your own restaurant it’s very hard work, but you’ve got to be prepared to be in for a long ride and remember to re-invest profit back into the business if you want to secure your future. You’ll need that buffer if you want to expand or for those rainy days.”
All this week we’ll be looking at the different ways you can secure funding to start-up or grow by showing examples of businesses who have already succeeded in the areas of self-funding, through the banks, private equity and new alternatives like crowd-funding.
Tomorrow, find out how two small restaurant groups managed to set-up and grow their businesses using their own funds.