Ben Barbanel of OakNorth offers 10 top tips on securing debt finance for boutique hotel projects.
I’ve met a lot of boutique hoteliers in the last few years and a topic that comes up constantly is debt finance and how to secure it. For any fast-growing boutique hotel business, the need for capital is constant so they therefore need to work with providers that can keep up with their pace. Unfortunately, this excludes most banks who are notoriously slow and often resort to opaque credit processes where the prospective borrower is left in the dark for months at a time. The uncertainty caused by Brexit has only made this worse with big banks slowing down their credit decision processes even further.
In this article, I explore some of the ways in which boutique hotel businesses can hopefully speed up this process and increase their chances of securing a loan from a bank.
1. A little due diligence goes a long way
One of the USPs that we’re most proud of is our ability to process complex multi-million pound loans in a fraction of the time it takes larger lenders, but with same level of rigorous and robust underwriting that you’d find at a private equity firm. Having run the numbers just last week, we found that the average time taken for us to complete a transaction – from first meeting to disbursement of cash – is three weeks. However, we can process transactions even faster if the borrower and their advisers prepare a robust due diligence pack, such as planning consent, development appraisals, valuations, the business plan, forecasts, etc.
2. Know your market
Earlier this year, we provided a £14.4 million loan to Frogmore, one of the UK’s leading real estate fund managers. The funds were going to be used to acquire a cleared site on Ufford Street in Southwark, and in its place, develop a new 275-bedroom boutique hotel. Southwark may not have seemed like the obvious choice to open a new boutique hotel in London – there are already several projects underway in the area: Hilton’s Hampton, Marriott’s Autograph, and Park Plaza’s Art’otel. However, its proximity to some of the capital’s most popular attractions – The Young Vic, The Old Vic, The London Eye, The London Dungeon, Sea Life, Southbank Centre and the Royal Festival Hall – means that the borough is still experiencing a shortage in hotel supply relative to demand. Kensington and Chelsea has three times as many hotel rooms while Westminster has more than seven times. Frogmore knew its market and was able to present a clear and concise rationale for the project to our credit committee. This played a significant role in ensuring they secured the debt finance they were looking for.
3. Have skin in the game
When seeking growth capital, a big tick for us is seeing that the borrower has skin in the game and has invested some of their own money in the project. OakNorth was founded by entrepreneurs, Rishi Khosla and Joel Perlman, who invested their own money, and almost half of our workforce are shareholders in the company having purchased equity in it. We want to see this same commitment from our borrowers.
4. Take time to build an excellent team
Since our launch, we have been focused on one thing; solving the problem of scaling non-standard lending in the UK, backing quality management teams in the process.
The Frogmore deal mentioned earlier came from a business with an incredibly strong track-record spanning more than five decades. The team’s last project in the hotel space – the 80-bedroom South Place Hotel – was a huge success and had been acquired by investors just a few months earlier. We were confident in the team’s ability to replicate this success with an even bigger project.
Having a strong team will be also particularly helpful if you don’t have an existing track record or a strong brand in this space yet. This is because it’s much harder for banks to underwrite the potential performance of an independent boutique hotel rather than a branded one. We did a £21 million transaction earlier this year for the development of a new hotel, L’Oscar, in central London. The hotel isn’t part of a well-known chain or existing brand, but it is going to be managed by Michael Voigt who has over 20 years’ experience in the luxury hospitality sector.
5. Cash(flow) is king
Every loan we write at OakNorth is driven by the customer’s ability to repay it, which starts and finishes with a healthy cashflow forecast. Typically, our borrowers generate between £5 million to £100 million in annual revenue and must be profitable businesses.
6. Develop a debt-specific business plan
When seeking growth capital, the lines between debt and equity can become very blurred. Most transactions are made up of a combination of both but it’s important that business plans are tailored to each. Equity providers are going to be a lot more concerned with the overall growth strategy and where the company expects to be in 10 years’ time when investors will be seeking a return. Debt providers however, will want to see a business plan that’s a lot more asset-aware and cash-flow focused.
7. The other metrics
While cash flow, a quality management, the location, and a strong business plan are all key, there are other factors that banks will take into consideration too. We completed a loan earlier this year to Z Hotels – an established boutique hotel chain with several sites in London and a handful in other key cities. On any given day, city centre hotels in London will experience 80 percent occupancy rates, but Z Hotels averages 99 percent across its hotels – why? Because their model works and they have proven it time and time again. They came to market with a compelling proposition – small, luxury hotels at an affordable price within central, city locations – and have now replicated the success of their first hotel across multiple sites. Their track record and business performance instilled a huge amount of confidence in our credit committee and assured them that they can continue going from strength to strength as they scale.
Interestingly on the L’Oscar deal mentioned earlier, the fact that it was being designed by a well-known creative in this space helped the credit committee in making their decision – Jacques Garcia has led projects at Hotel Costes in Paris, the Nomad hotel in New York, and Vagabond Hotel in Singapore.
8. Show how hungry you are
Since our launch in September 2015, we have grown to 140 people, built a loan book of more than £700 million with a qualified pipeline of a further £700 million, turned profitable, and attracted almost 15,000 retail deposit customers. We have no intention of slowing down and we want to work with businesses that are as ambitious and hungry as we are. Our clients are typically growing by 25 per cent or more year-on-year and have a clear growth strategy. To use the example of Z Hotels – it has expanded aggressively in the last few years with eight sites in its portfolio and another six in the pipeline. As a debt finance provider, a good lending opportunity is sweetened further if there’s a chance that we might be able to work with the borrower on another deal soon.
9. Look beyond equity
Many boutique hoteliers who are propelled into a sudden growth trajectory think mostly about raising risk-sharing equity investment from venture capitalist, private equity houses, or angels. These are business owners who have a proven business model that’s making money, but who feel forced to dilute and choose equity finance because traditional bank finance isn’t fast enough, flexible enough, or collaborative enough. If you are an established, profitable boutique hotel business, there is no reason why you shouldn’t be able to secure debt, so don’t sell yourself short – consider all your options and take the time to find the right financing structure for your needs.
10. Take a whole of market view
According to the Competition & Market Authority’s Retail Banking Investigation last year, 90 per cent of SMEs in the UK bank with either Barclays, RBS, Santander, Lloyds or HSBC, and 90 per cent of those businesses only go to their current account provider when seeking a loan. If they get a ‘no’, they don’t go anywhere else. This is a huge mistake. The savviest of businesses develop relationships with multiple financial institutions, using multiple providers to ensure they get the best of every product. At OakNorth, we’re not trying to be all things to all people, we just want to do one thing really really well – loans. Everything we do is focused on how we can improve this proposition for the customer, ensuring that speed, transparency, flexibility and entrepreneurialism are present on every deal.