Penny wise and pound foolish

Getting the best deal for a loan, being properly insured and regular accountancy updates can make all the difference between licensees struggling or sleeping easy at night. Graham Ridout listens to the advice of finance, accountancy and insurance experts

High-street banks are usually the first port of call for many newcomers to the trade seeking finance. Yet as David Cartwright of Cartwright Commercial Finance explains: "By their very nature, financial brokers deal with numerous lenders and can, therefore, offer a better rate. High-street banks make you jump through hoops and see several people before offering you a commercial loan. But if banks know a broker is involved, they will offer a keen rate. I often secure a loan with one phone call."

Cartwright's views are shared by Paul Thompson of Acorn Commercial Finance. Thompson says: "We do little business with the big five banks. We can offer better rates, higher loans and turn things around quickly. We have just finalised an offer in 16 days, which included carrying out an evaluation, whereas one of the big five has been working on it for six weeks and still hasn't made an

offer."

Thompson says licensees should carefully consider the loan period. "A typical loan on a freehouse is £500,000, which, with an interest rate of 7% (2% above the base rate), equates to repayments of £4,496 per month over 15 years - the maximum term offered by most high street banks. But if the loan is spread over 25 years, monthly repayments are £3,535. That is nearly £1,000 less per month, which can make or break a business, especially in the early days."

Both firms recommend that buyers employ licensed-trade specialists such as solicitors, valuers and accountants. Thompson says this is essential to avoid having the premises undervalued and buyers therefore not able to secure a loan, or ending up with a pub that is vastly overpriced for its trading performance. Thompson cites the case of one of the big five that used a commercial property surveyor who valued a pub at £240,000 against an asking price of £400,000, whereas a subsequent valuation by a licensed trade surveyor confirmed the pub's trading performance warranted the asking price. Likewise, he's seen "ridiculous" prices being asked "for rubbish pubs" with little hope of buyers making a go of them.

Cartwright adds: "I can't emphasis enough to people that they should employ people who specialise in pubs. They should also only deal with firms that are members of the National Association of Commercial Finance Brokers (NACFB)."

He says members of NACFB comply with a code of practice that has been sanctioned by the Office of Fair Trading, and the association has mechanisms in place to redress any complaints of professional misconduct.

Make sure you're covered

When tenants are faced with hefty bills from their landlords for building insurance, they can almost be forgiven for succumbing to temptation and skimping on the insurance cover they take out for their furniture and fittings.

Paul Baily, head of the licensed trade department at insurance specialist

Towergate, warns that this false economy could cost licensees dearly, if they have to make a claim.

Baily advises: "It is important that people take out policies that have 'new-for-old' cover and they should also make sure they are not under-insured. Many people try to save money artificially by under-insuring to save a £100 or so. If they insure their possessions for, say, £10,000 when the true figure should be £20,000, they will only get half of the replacement value."

Ross Edgar, sales manager of commercial insurance broker Morgan Richardson, in Billericay, Essex, says the problem of under-insurance often arises when pubs change hands. "The new owner might have paid £20,000 for the contents without realising the replacement costs based on new-for-old might perhaps be £50,000 to £60,000. One of the key issues that we emphasise is that people should consider everything such as the bar, electrical equipment, decorations and the cost of replacing kitchen equipment. If they aren't sure, then it will only take them an hour or so, on the internet, to get an idea of the value.

"Also, when their insurance comes up for renewal, they should consider all the improvements that have been done, such as replacing old TV screens with plasmas."

Another consideration, says Edgar, is for licensees to think about their business income and any consequential losses that would occur if their pub suffered from, say, fire or flood damage. "One of the benefits we offer is up to 24 months' cover, to take into account the time to repair or rebuild the pub, and also the time it takes to rebuild trade to the level it was before the incident."

Although licensees can approach

insurance companies directly, Edgar says specialist brokers can ensure all risks are covered: "We set the terms and conditions and then use a panel of insurers, who come on board with our terms."

Baily also urges licensees to ensure they have adequate public liability insurance. "We offer up to £5m of public liability insurance, but every licensee should have a least £2m of cover. Unfortunately, we are living in a litigious age. Only the other day, we heard of a claim from someone who had burnt themselves after leaning on a candle in a pub. This sort of case is becoming

common, so licensees should make sure they are adequately covered."

Edgar agrees: "The rise in the number of 'no win, no fee' companies has coincided with a massive number of fraudulent claims, which can cost thousands of pounds in legal fees to defend."

Edgar urges licensees to make sure their premises are in a good state of repair and compile periodic safety and risk assessment reports. "Therefore, in the event of a claim, you can show people you have a well-run business."

When things go wrong

Steve Kenway of financial recovery consultancy Hannah James & Co says he often sees cases where licensees are facing bankruptcy and losing their businesses.

He says: "In general, lots of people who take on pubs are not business-minded

and have little or no experience running their own business. When people get into financial difficulties, they keep the brewery or pub company on side by paying for the beer and the rent. They also pay their staff, but tend to leave the job of paying VAT

and income tax to Revenue & Customs, or

business rates to the local authorities. It is only when they receive a statutory demand that they realise how bad things are."

Even at this stage, it is not too late to get help. Kenway adds: "We can help them with their accounts and put in their VAT returns and have managed to postpone bankruptcy hearings five, six, even seven times, so that licensees can sort out their finances."

Changes to the Insolvency Act have also made it easier for individuals to declare themselves bankrupt, although Kenway

cautions that this will affect their ability to get credit cards and mortgages.

He recalls a recent case where a couple running a pub had built up debts, mainly in the wife's name, of £80,000. "We advised the her to go bankrupt and form a limited company so they could continue to run the pub."

Kenway says most people entering the trade should consider setting up a limited company, which rents the fittings and

fixtures etc, from the individuals running the pub. "That way, if the limited company gets into difficulties, then a bailiff sent by say Revenue & Customs, will not be able to take possession of any articles as they are not owned by the company, just rented."

One way of trying to trade out of

financial difficulties is for individuals to enter a voluntary arrangement, whereby creditors are paid back over a period of time. However, Kenway cautions: "We don't like them. People face expensive outgoings for, say, five years, while they still struggle to make a living. More often that not, they end up bankrupt."