Mark Jones looks at the lending landscape for hotel owners who want to secure funding for growth.
One of the many ongoing challenges for the independent hotelier is balancing the aspirations and goals of building the perfect customer environment with the harsh economic realities of funding and cashflow. Not only have customers’ expectations increased, but they have access to numerous platforms to give and receive feedback, meaning that delaying decisions to refresh or enhance facilities risks becoming a costly mistake.
From experience, most independents look at two key sources of funding – self-financing and the High Street banks. They will also take supplier-introduced financing on ad-hoc purchases on a non-strategic basis.
This can mean many things to many people, ranging from simply paying from cashflow to remortgaging the family home to inject money into the business.
If the money really is available, and there is no other use to which it is likely to be put (opportunity cost), then self-funding is perhaps a no-brainer. If on the other hand, you are selling the family silver, delaying revenue-creating opportunities (or jeopardising existing revenue streams) or putting undue strain on cashflow, it can be something of an own-goal. In any case, an element of the owner’s own money going into a business will always be viewed as a positive by prospective lenders.
• High Street banks
Anecdotal evidence suggests that the High Street banks remain strong in funding freehold or long-term leasehold hotel assets, using the property itself as security for mortgages and business loans. There is some fluctuation with individual banks cooling to the sector, whilst others warm to it, but overall the general buoyancy of the hotel industry (possibly helped by current exchange rates) is maintaining confidence and therefore a willingness to lend on conventional terms and good rates. Beyond the recognised High Street brands, there is a raft of challenger banks who aim to provide a more personalised, modern service and add healthy competition in what can be seen as a complacent sector. Challenger banks will often not be seen on the High Street, but in many cases will be established foreign banks with dedication to specific sectors.
If you overlook the pendulum effect of their madder years (for example lurching from lending everything to lending nothing in 2008), the banks are pretty consistent in their offering. They will take a valuation on the business and predominantly base their facilities around that and serviceability equations calculated on historic accounts. This is great when you want to leverage bricks and mortar in a profitable, established hotel but less useful when you are rolling out a bedroom refurb programme or turning dead space in your cellar into a gym and spa facility to enhance future revenues and optimise space. And this is why the alternative finance market is booming.
• Alternative finance
Alternative finance has been around for a long time. The term broadly refers to funding not provided by banks or widely known sources. With extensive media coverage – particularly regarding crowd funding, it is now increasingly in the public eye (and sometimes trendily labelled “alt-fi”) – several alternative lenders are now supported by the British Business Bank. The number of lenders is growing and their broader interpretation of risk is facilitating deals in the hotel sector which would previously have been somewhat challenging.
Whilst crowd funding gets much of the media space, it is a small part of the alt-fi lending arena. Lenders might be lesser-known merchant banks, subsidiaries of companies not usually associated with finance, start-ups dedicated to business lending or even wealthy individuals running small boutique lending companies.
• What constitutes an asset?
Perhaps the biggest change relevant to hoteliers is the interpretation of what constitutes an asset for finance purposes. Traditionally ‘assets’ were defined as having residual values and serial numbers. In the context of hotels, that pretty much limited asset finance to vehicles, cookers or, at a push certain items of furniture. However the new wave of lenders has recognised that value isn’t just about what something will fetch at auction, it is about what it adds to the business itself.
A favourite example of this is the front of house carpet. Ripped up and recovered it is valueless – indeed it will incur disposal costs – however, in-situ at the hotel it is arguably the single most important item in the building, setting the tone and impression for the customer’s experience. To a modern alternative financier this makes it an eminently financeable asset.
Another divergence from traditional funding rules is a certain appetite to lend based against the prospects or returns from expenditure rather than relying totally on historical trading information. This is particularly valuable to start-ups or buy-outs where they bring strong business credentials coupled with enthusiasm but access to funding – and therefore capacity to improve facilities – might be restricted. Similarly, where a hotel has been “treading water” and is ready to go to the next level, conventional avenues might prove unwilling to help whereas alt-fi might be the answer.
• Making yourself attractive to funders
Whilst there is a strong appetite to lend in the market, you can’t escape the fact that anybody lending wants confidence that they will see their money back. In a perfect world this will be illustrated by:
• Clean credit history.
• Several years profitability.
• A well-conducted banking relationship with no returned items.
However, the world of business and of hospitality is neither easy nor perfect, and the alternative finance market to some extent recognises this, and will consider cases that fall below what are conventionally recognised as “sound lending propositions”. As a result, lenders are able to consider cases where there are CCJs, historic losses or some “glitches” in the banking relationship. That said, they do need to see a solid and compelling proposition, so will need to be presented with accurate, current financial information.
It is vital that you are up front about any “nasties” – lenders don’t like bad surprises! Support that with a verifiable narrative on why the problems won’t reoccur. In extreme cases a second charge on freehold property might be required, though there are many potential solutions before that point is reached.
Despite some enthusiastic headlines, alternative finance won’t be displacing the banking sector any time soon. The best advice is always to keep a good banking relationship and to discuss your ongoing needs, particularly for bigger capital projects. If your bank isn’t servicing those needs, there are always options that can be considered. The role of alternative finance isn’t to displace the bank, but to create a quicker, slicker alternative for one-off or rolling expenditure which keeps your banking lines free for bigger plans, or simply opens up wider lines of credit for future use.
Mark Jones is a director of Fit Out Finance. Fit Out Finance helps independent hotels and restaurant businesses grow by providing bespoke funding for premise fit outs, redevelopment and expansion, offering up to 100 per cent funding of project costs.