Financing a pub buy
Q I'm looking to buy a pub and need to raise some capital. What's my first step?
A The first step is to assess exactly what you are able to contribute. Make a list of your realisable assets - house, savings, investments. Now add up your liabilities - mortgage, loans, cards etc. Subtract one from the other and this is your deposit.
Talk to your finance broker at this stage before taking any action.
A good broker will give you an idea of what you can afford and help you to identify the best type of outlet to look at.
To find a broker who is signed up to the Office of Fair Trading approved code of conduct, contact the National Association of Commercial Finance Brokers (NACFB).
Q What should I do with my house?
A What you do with your house depends on a number of factors. You might like to stay living in it, especially if you are buying a "lock-up" bar. You may choose to let it so you can make long-term gains.
The problem here is that lenders will look at a lower equity figure than you expect, often 80 to 85 per cent. The other consideration here is that there may be rent voids, if you have no tenant for a few months or the house needs refurbishing between tenants, this may have to come out of the pub profits. You may have to consider if this is going to be an affordable situation.
With these questions in mind, it is sometimes better to sell the house and put the extra money into a better pub. Once things are going according to plan there is always the option of buying another house if that's the way you want to go.
Q What types of financing are available?
A A commercial mortgage: which is effectively the same as a domestic mortgage, usually arranged over 25 to 30 years with options built in to pay off earlier when cashflow allows.
The mortgage is secured against the property - and probably the goodwill - and could be up to 75 per cent of the market value, including goodwill, of the pub.
A brewery loan: a traditional way of borrowing money in the trade these are typically Advance of Discount (AOD) or "Write Off" loans, the interest rates seem very favourable at significant discounts over the banks but you lose barrelage discount and have to repay the principal over 10 years.
Domestic re-mortgage: taking money out of the house, especially to buy a cheap lease is often an option and can be easy, but buyers should always take advice on the purchase - there are too many pubs in difficulty to consider buying without professional help. Also taking a further advance on the mortgage will often mean that you give up the tax relief you would have received against the interest of your commercial loan.
The other option is a personal loan.
Q Is a lease different to a freehold in terms of raising money?
A Yes. A lease does not offer security to a lender. The loan against a freehold is secured against the property so the lender is more keen to lend against a freehold.
It is by no means impossible to raise finance against a lease but it is significantly more difficult, the problem being the lack of security against the lease. This means that many lenders will be looking to the borrower for a good level of past experience and possibly some sort of security.
The level of loan will be lower - typically only 60 per cent of the value of the lease which coupled with a pub company wanting three months rent as a bond, means that the cash required for a lease can be much more than expected. In many cases the deposit required to buy a half-decent lease would get the client a far better shot than the freehold they were thinking was five years away.
Q Should you pay money up front to a broker?
A Most brokers will charge a small commitment or assessment fee. If your broker is reputable you will have received a full terms of business agreement which will indicate the terms of the loan you should expect. Read this agreement carefully - you are agreeing to pay a larger fee later on.
Q How do I check if a finance company is reputable or not?
A Take references, meet at their office, and check with the NACFB.
- Paul Thompson is a partner at Acorn Commerical Finance
