Funding hospitality: The banks

Banks are now much more reluctant to deploy capital in the hospitality industry

Whether you’re a budding entrepreneur with a bold idea for a new restaurant concept or a successful hotelier with plans to expand an already popular business, there’s one thing you’ll always have in common – a bank account.

It is no surprise then, that the banks are nearly always the first port of call for funding in the hospitality industry. But, as everybody knows, the beleaguered state of the UK economy has led to sharp declines in lending, particularly for smaller businesses, and the bank manager that was perhaps once your best friend is now much more reluctant to deploy capital.

This is reflected in recent research conducted by accountancy firm RSM Tenon, which found that nearly half (47 per cent) of hospitality and leisure businesses are now turning to alternative sources of financeto assist with their expansion as many look to return to growth in this financial year.

“Funding from banks is difficult, especially for many independent owner-operators,” admits Ufi Ibrahim, chief executive of the British Hospitality Association. “They might like to add a few rooms or refurbish or bring in new facilities, but it’s difficult to persuade the banks to provide them with the funds, even though the business case is strong.”

As with most sectors in the UK, there was once a ‘golden age’ when you could approach a bank with an attractive new business idea and it’s likely a deal would be struck. But that age has passed and the banks are now scrutinising every deal more than ever.

As Sam Fuller, managing director of investment bank Altium, explains: “In the past, leisure’s been one of our more dominant sectors, but leisure transactions have been a bit few and far between more recently.”

Fuller understands the negative effects this tightening in lending has had on the hospitality industry - in recent years, his business has advised the likes of Eat, Carluccio’s, La Tasca, Capital Pub Compnay and the now-in-administration Luminar.

Friends & family

“I meet a lot of people who’ve got a couple of units and want to open a couple more, but it’s quite hard to get a fee out of that to be honest so we tend to just advise the bigger guys, based on the fact that we need to make some money out of it.

“If someone hasn’t got a track record nowadays, they nearly always have to find that money from friends and family. In this market it’s pretty hard to get backing from banks with just an idea, unless it’s one hell of an idea.”

Fuller goes on to point out that, although the recession and Eurozone crisis have contributed significantly to the restrictions in bank lending, the banks themselves have, in some respects, added to the financial difficulties for smaller concepts and  start-up businesses.

“A lot of the deals that were done a few years ago had a lot of debt put into them. Every big deal that was done in 2007 and 2008 had a lot of debt in it, from Gondola through Gaucho. As a result of that, a lot of the banks are now over-exposed and they’ve got more debt in the hospitality sector than they would ideally like.

“There are solutions popping up, but it’s a tough conversation to have if you’re an entrepreneur going into the bank at the moment because frankly they would rather put their money elsewhere, to the extent that I actually think it’s on their stop list - they really don’t want to lend to anything on the high street.”

Still investing

This isn’t to say that banks have stopped giving entirely and there are numerous recent examples which show that banks are still willing to invest, albeit with more caution:

  • YTL Hotels, owned by the Malaysian-based conglomerate YTL Corporation Berhad, recently received a £20m loanto fund its plans for a redevelopment of the Gainsborough Building in Bath and two other buildings into a five-star hotel and spa.
  • Barclays has supported Indigo Leisure, the pub group, with a National Loan Guarantee Scheme(NLGS) loan of £900,000, to purchase the freehold of ‘The Good Companion’ pub in Brighton.
  • Barclays has also provided the Chop’d salad bar with funding to support its expansion and supported Beale’s Limited with a NLGS loan to enable the family business to purchase the freehold of West Lodge Park Hotel in Enfield.

Another recent example of a business which received support from the bank is Benito’s Hat, which now has four Mexican kitchens across London.The concept was co-founded by Ben Fordham, who was able to initially raise finance through friends and family.

“When we were a start-up our initial plan was to get a combination of bank debt and our friends and family investors,” explains Fordham. “We were opening in the summer of 2008 and the Royal Bank of Scotland was extremely positive but then at the last minute said no.

“But for our second store in Covent Garden,about a year and a half in, we did raise about £200k of bank debt through NatWest. I think this was really because we got a junior bank manager who was very excited by our concept and he was really enthusiastic – despite credit controls saying no several times, he forced it through.”

“I think that this sort of factor is absolutely fundamental for you to get anywhere in this environment because the bank’s standard response, particularly for young restaurant companies, is no and they quote figures like 90 per cent failure rate on loans to restaurants and they are not keen to do it.”

Tough hospitality market

But the reduction in the number of deals being struck between hospitality businesses and banks is not necessarily a case of tight-fisted bankers. So says Mike Saul, head of hospitality and leisure at Barclays, which supports the majority of the UK’s large restaurant chains.

“We haven’t changed our policy pre or post-recession, so our parameters for lending haven’t changed at all,” says Saul. “What has changed in some cases is whether the customer can still deliver because the market has become a lot tougher.

“We typically agree nine out of 10 things that go through our credit teams, so we’ve absolutely got the money to lend but we’re not getting as much requests because people are not typically being as go-get or outward about acquisition opportunities.”

Nonetheless, the fact remains that there has been a drop in lending, by around 16 per cent since 2008. In response, Chancellor George Osborne last month announced the introduction of the multi-billion-pound Funding for Lending scheme, designed to make more, and cheaper, loans and available to businesses.

The scheme was welcomed by the Forum of Private Business’ chief executive Phil Orford, who said: “Borrowing costs have been rising while lending has continued to fall, so on the face of it this should be good news for those small businesses struggling to make ends meet.

“We can only hope that the banks now embrace it as an enabler to boost lending, which in turn will help recharge the UK economy and get it growing out of recession.”

Before walking into ‘the Dragon’s Den’

Whether you’re a start-up business or an expanding concept, there are a number of boxes that should be ticked if you’re to stand any chance receiving any support from the banks: -

  • “Preparation is vital,” says Fuller from Altium. “In particular, getting your story straight and your financial numbers straight - the more thought you give it, the better. Banks don’t need many excuses not to do a deal in the current market.”
  • “Always think about your five year plan, what you’re looking to achieve and how you think we can we help you get there,” advises Barclays’ Saul. “We look at every single request individually, there isn’t a specific formula, but what there is a formula around is whether the company can repay the debt back.”
  • “Overriding all of that is what the management team is like,” adds Saul. If you’ve got good credentials and a strong track record then we’ll be a lot more comfortable with everything that’s being said - we would look at the management capability of a business as equating to something between 30 and 35 per cent of the overall proposition, so a good track record is key.”
  • Know what your USP is and who you’re main competition is.
  • Remember, a bank is also there to test the water – you don’t have to approach a potential deal with a finished product, it could be more of a ‘what-if’ scenario.
  • Another thing to think about is the use of banking ancillary services. If you have a number of sites, then including the use of the banks own card terminals within your venues can make a real difference when it comes to striking a deal.

Banks: the future…

As mentioned at the beginning of this feature, the banks have been, and always will be, the first port of call for hospitality businesses seeking funding. But the burning question is if bank lending will ever increase, and when that will happen. 

One thing to note is that the hospitality industry is discretionary; if something happens in the wider economy, hospitality has traditionally been an area that the public cut back on. But, as Fuller concludes, the link between the recession and eating out or hotel bookings is not as direct as it used to be, and there could in fact be light at the end of the tunnel.

“All the recent statistics about eating out becoming a way of lifepoint in the direction that the leisure and hospitality industries are on the up and here to stay,” he says. “I think there’s going to be a couple of tough years, but as soon as there’s uplift in the economy then I think money will come back and the banks will begin lending in a meaningful way.

“Right now, although the banks are not necessarily deploying as much capital as they used to, the hospitality and leisure teams are still pretty good at getting out and about and meeting entrepreneurs. You are always going to be in conversation with a bank but you just have to be a bit more realistic about the likelihood of getting ambitious funding from a bank.

“The hospitality industry is going nowhere so, in the long-term, it’s a good place for the banks to invest money.”

To view all of our articles in this Special Feature, click here.

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