The right approach to bank borrowing

Many pub purchasers will be looking to take some borrowing, to assist with the purchase of their pub. While lending to the hospitality sector is still challenging there is a strong appetite among lenders, although an understanding of the criteria they impose is vital.

The recommendation is to talk to an experienced licensed trade finance broker at the outset who can guide you through this and provide a realistic assessment of what can be achieved.

A cash deposit will be required towards the purchase — typically this ranges from 30% to 50% of the purchase price dependent on trade experience and the businesses profitability/potential. This will apply both to pubs being sold as going concerns and those without accounts.

Business plan​

The key to any mortgage application is a well thought out business plan. In addition to the usual information on your plans and ideas for the business, you should include a competitor analysis to show the lender that you have recognised your competition and identified their strengths and weaknesses. You should also consider staffing, to determine likely wages costs and importantly how you plan to incentivise and retain key members of staff.

When a lender considers accounts and forecasts they are looking at the net profit of the business in relation to the loan repayment. They will take the actual or projected net profit and from this deduct your own drawings requirement (so it is important to keep this to a minimum). They will then apply a formula to this to ensure that sufficient profit is generated for the amount of loan requested. Again a broker should be able to guide you on this to ensure you do not submit a business plan that does not achieve the lender’s criteria.

Accounts​

If you are a current or recent operator the lender will want to see accounts from your own business and will require six months worth of business and personal bank statements. All bank accounts should demonstrate that they have been conducted in line with planned overdrafts limits.

Please also bear in mind that the lender will carry out an internet search on your business to look at your website and customer feedback.

Interest rate margins are currently low with average interest rates of around 3% pa currently being achieved. In your business planning, however, you will need to consider the effect of future interest rate rises. To assess how this will impact on your borrowing we have a mortgage repayment calculator at www.pub-mortgage.co.uk where you can check the cost of repayments.

Funding is available for the purchase of pubs whether they have accounts or not but take the opportunity of talking to a specialist before you pitch to your bank.

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