Restaurant finance: Getting money for expansion

As opposed to start-up financing, expansion funds will most likely come in the form of debt, not equity. A variety of loan repayment options are available, and new lenders are putting the accent on ease of application and flexibility.

Moreover, though not many investors want to take risks on businesses with no history, it doesn’t take years of continued success to give them the confidence they need.

Credit card repayments: The low-risk solution​

Alternative lenders offering unsecured loans to small businesses understand the seasonality of hospitality profits, and they have come up with a flexible repayment system based on credit card receipts.

“We advance money to a landlord and get paid back through their future debit and credit card receivables so essentially, their customers are paying us back, not them. Every time their card machines are being used, we’re taking a fixed percentage that we agree on with the retailer, on a daily basis,” says Liberis​​ CEO Paul Mildenstein.

At Boost Capital, which also offers that product, CEO Marc Glazer explains: “A fixed payment throughout the year may become too cumbersome; it really depends on the business’s cash flow, and certainly in hospitality, which for the most part has different cyclical times, we think the merchant cash advance is a great product.”

According to Mildenstein, the percentage of credit and debit card receivables used for repayment sits between 0 and 20 per cent, depending on the business type and how long they want the money for – and advances are typically repaid within six to nine months.

Lenders of this type don’t provide start-up finance (though Liberis is looking at funding entrepreneurs taking on franchises), but six to nine months in business and a monthly turnover of around £6,000 are enough to be considered.

“We don’t provide start-up capital, but that said, a nine-month-old company is still pretty close. What most of the money is typically used for could be remodelling, expansion, opening up a second location, marketing, advertising – typically things to help them grow their business. They’re able to utilise the funds and pay us back as success comes,” adds Glazer.

The application process is easy, with a few forms to fill out and debit and credit card statement to send, and the money is usually disbursed within a week of applying.

Peer-to-peer lending: The new kid on the block​

Another alternative that is gaining momentum is peer-to-peer lending. Similar to crowdfunding and often included in its loose definition, the industry raises debt finance from a pool of investors via an online platform.

“When you come to Funding Circle as a small business you’re taking a loan and you pay that back with interest to the investors.

“You have to have been operating for at least two years, and have a turnover of more than £50,000, so we’re not for start-ups, we are for small businesses that are looking to employ more people, expand their premises or buy new machinery,” says Funding Circle’s Natasha Jones.

After receiving an online application, the firm’s sales team – most of whom come from a banking background – conducts a credit assessment and delivers an answer within 48 hours. Once selected, the business receives a ‘wristband’ rating it from A+ to C- depending on how healthy the investment looks.

It is then exposed to a bank of 33,000 individual investors, as well as the British Business Bank (which makes up 10 per cent of each loan on the platform), and ten local councils lending to businesses within their region.

Investors can use an ‘auto-bid’ tool or review loan applications manually, and targets tend to be reached within a few hours.

“The businesses have the option to take the loan at the average rate it’s offered then or keep it on the marketplace for the full seven-day auction, which they usually do. Just like on Ebay prices go up, investors continue to bid on the loan, and interest rates usually become more competitive.

“After that they have five working days to let us know whether they’d like to accept the loan at that rate. There is no penalty if they don’t accept the loan, and there is no early repayment fee so if they suddenly find themselves in a good position and would like to repay the loan,” Jones adds.

Repayment periods range between six months and five years, and a £100,000 loan is typically made up of around 100 investors.

Sector distribution at Funding Circle​

Leisure and hospitality currently represents 7 per cent (£28.5m) of all lending on Funding Circle, but other platforms could soon have a stronger focus on the sector.

“We are not setting specifics, but it’s fair to say that with our backgrounds and Adam Simmonds’ first restaurant being the pioneering fundraising for us, we’re likely to have a lot of demand from hospitality businesses,” says Chris Rose at Karadoo, a peer-to-peer lending platform launching in the new year.

Banks: The cheap option​

Out of all the different funding alternatives, banks remain the best-known, most popular, and cheapest option. During the financial crisis, they got a bad reputation for not giving enough support to small businesses, and today they are sometimes still accused of fuelling SME funding gap​​ – which sits at around £4.3bn according to the Bank of England’s latest figures.

But for Andrew Taylor, head of leisure at Natwest, banks are making considerable efforts to support SMEs. “There was obviously a difficult period in 2008 when the whole economy went into recession and banks became more cautious towards lending, but Natwest has been working very hard for SME-type businesses, with initiatives like the Leisure Fund, which feels like a pretty big contribution and effort,” he says.

Natwest’s Leisure Fund​​ granted £500m worth of loan applications to 900 individual hospitality businesses in 52 weeks last year, £400m of was actually taken up by the applicants.

The key for restaurants – which often don’t own a property they can use as security – is proving their ability to repay the loan.

“We spend a lot of time with businesses that are expanding, so it’s key to know what their proposition is, and whether it’s understood by the market and can be rolled out on a wider basis. If so, we go on to where and when they are going to do it and whether they’ve got the right people to do it. We want to know if the business has the right characteristics and management to grow,” Taylor adds.

When an application is denied, the bank often has an appeal system to give candidates a second chance. Besides, banks could soon be required to refer declined applications to alternative financiers.

“The Queen’s Speech said it would happen, but now the process has to be put in place, so the government, lenders like us and banks are working together to find the best way to implement the referral process. We’re probably about six to nine month off the finished item, but it will happen,” says Liberis’ Mildenstein.

Crowdfunded mini-bonds: The buzz maker​

It would have been hard to miss Chilango’s Burrito Bond​​ this year: in a first for crowdfunding platform CrowdCube, the Mexican restaurant chain raised over £2m of investment with a mini-bond offering investors 8 per cent return a year for four years.

Crowdcube had the same mini-bond success with River Cottage​​ (£1m), and is currently hosting Taylor St Baristas’ Coffee Bond campaign​​.

“What we wanted to do with the mini-bond product was develop a solution that was targeted at more established businesses and well-known brands.

“Chilango really fitted that bill, especially the ethos and the culture behind the company. They like to think differently and the idea that they could open up the fundraising to give their customers and employees the opportunity to invest in the business was something that really resonated with them, and clearly it also resonated with their customers. It’s a really powerful endorsement for the company,” says CrowdCube CEO Luke Lang.

The mini-bond is well suited for ambitious firms with a very strong following – firms that could easily find financing elsewhere. This is evidence of the changing face of funding in hospitality, moving from single avenue to bespoke solutions, and the rise in popularity of ‘alternative’ sources.

“In the US six or seven years ago alternative funding was new, but today so many businesses use it that it’s become very much mainstream. In the UK it’s not there yet, but the more competitors are out there, the more they will educate small businesses on the solutions that exist,” says Boost capital’s Glazer.

Natwest’s Taylor adds: “The thing to bear in mind is that each of these funding types carries a different cost. Crowdfunding and equity are a lot more expensive than traditional bank debt. Fundamentally, you’re going to want as low a cost of capital as you can achieve, but it’s all about choice.”