Although the competition in the business borrowing market is great for business owners, as more competition equals more competitive pricing, it can become a little confusing.
Knowing which product is the most suitable for your circumstances is now more complex than ever. In this detailed guide, we will break down the lending tools available to hoteliers, how they work, what they cost and the situations they should be considered for.
Start-up loans, as the name suggests are business loans for new companies and can be used for a number of different purposes, such as providing a cash injection, marketing the business or purchasing stock. Most schemes will be government or EU backed. Funding routes are limited for new businesses therefore bespoke start-up loans can be a vital source of funding for to get the business off the ground. You should, however, be aware that if your business is slow to take off, it could be difficult to maintain the monthly repayments.
As lenders are not able to see a proven track record of income generated from the business, they must rely on projected income meaning they will be very cautious when deciding whether or not to lend and at what interest rate. When applying for a start-up loan, it’s vitally important that the business plan, cash flow forecasts and budgets are all comprehensive, accurate and well presented.
Interest rates are often fixed at around 6% and borrowing is usually repaid over one to five years. Start-up loans are meant to be a quick route to getting the money you need, but due to the high risk of lending to new businesses, lenders tend to be cautious. Although the application process is designed to take two to three weeks, applications can often take several months.
It’s worth considering that the process can be time-consuming and similar to that of securing a government grant. Before applying, check whether there are any business grants available in your area, as they will not have to be repaid.
Revolving Credit Facilities
Once your hotel has been trading for a while and you can evidence income, the finance options will start to increase. Although you can still apply for most start-up loans for up to two years after you start trading, other options start to open up to you once you’ve been trading for three months.
One of those options is a revolving credit facility. Revolving credit facilities are pre-agreed credit facilities that can be borrowed against and repaid as many times as required, such as credit cards. There are a number of revolving credit options available for Hoteliers, such as business credit cards, overdrafts and specialist revolving credit facilities.
Revolving credit facilities are perfect for managing periods of tight cash flow and offer a buffer to ensure you don’t run out of money during quiet periods. Revolving credit facilities are available from £1,000 with some facilities allowing a maximum of £250,000 or even £500,000. A major advantage over other forms of borrowing is that the funds can be released quickly, often in just one or two working days.
Although they can be set up in a number of different ways, through overdrafts, cards or online portals, they all provide a very similar service. There can be big differences in cost, however, so it’s a good idea to get multiple quotes before applying. Rates can vary between 9-72% per annum.
Unsecured business loans are loans to business that are not secured against an asset. This type of funding is becoming a very popular choice with business owners. Banks have tightened up on their business loan lending whereas new entrants to the market, including a number of peer to peer lenders, are lending heavily. Most business loan lenders will only lend to businesses that have been trading for 24 months or more and can evidence profitability. There are options available for businesses that have been trading for less than this, however, the rate charged will tend to be fairly high.
Business loans are ideal for various situations, including the improvement of cash flow, funding improvements to your building, or funding growth. Borrowing can usually be repaid over five years and for strong businesses, rates in the market are currently as low as 3.6%, making the monthly repayments very affordable. Unlike start-up loans, applications for established businesses tend to complete a lot quicker, usually in a week or two and the application process is very straightforward.
Business Cash Advances
Business cash advances, also known as merchant cash advances are another form of fast, unsecured business funding. They are ideal for hotels with strong takings using their card terminal to secure the funding. Applications are completed very quickly, with funds usually drawn down by the applicant within a day or two. The application process is very straightforward as the lender will work with your card terminal provider to understand your transaction volume, which will control the maximum advance.
Theoretically, any business that a card terminal can secure a business cash advance. For the highest chance of success, your business will have been trading for 12 months or more and take a good proportion of your income through your card terminal. Unlike the other types of funding mentioned above, there is no fixed monthly repayment to make, instead, a set percentage of each card transactions are assigned back to the lender. This means you pay more back when card takings are up, and less during the quieter times, which can be ideal for a seasonal business.
Directly comparing the cost of borrowing against the other products mentioned can be difficult, as rather than a set interest rate, lenders instead agree a set repayment amount. Card takings can vary and therefore the amount repaid per month will also vary. As a result, it’s impossible to create a comparable interest rate, until you know how long the money has been borrowed for.
Business cash advances are ideal for when you need money in a hurry and want to take advantage of the flexible repayment structure. Applications can complete much quicker than unsecured business loans, and the repayment structures are more flexible than loans or revolving credit facilities.
Asset finance can be used for two main purposes – to purchase new assets such as equipment, or to raise capital using existing assets as security. Asset finance is often used in the hotel industry to purchase or refinance a range of items including air-conditioning equipment, kitchen and catering equipment, EPOS and furniture, among other things.
Asset finance can be a low-cost solution with rates starting from as low as 3% per annum. There are a number of different methods of arranging asset finance, they can range from products that work similarly to a loan, to leasing options. Where leasing options are used, they can run for the life of the equipment and a direct cost comparison against a loan can be difficult to make.
Asset finance lenders are more secure in their lending than unsecured business loan lenders as they have the security of the item purchased. If the repayments weren’t made, they could take the equipment back, meaning it can be easier to secure asset finance than some of the other, unsecured options.
Asset finance lenders tend to look at the business in question in a more detailed way than with other finance types. This allows them to truly understand the business, and as such, the application approval rate is usually higher than the other types of borrowing. The main downside of using asset finance to raise money for your hotel is that applications take weeks rather than days to complete. The detailed underwriting process means that applications usually takes two to four weeks to complete.
Commercial mortgages can obviously be used to buy a hotel or building, but they can also be used to raise capital through a commercial remortgage. Commercial mortgage rates for strong hotels tend to be the lowest of all the products mentioned, and they can be taken out over the longest term, meaning they will usually have the lowest monthly repayments.
Commercial mortgages are usually available from £26,000 – with no maximum loan. Lenders will often accept terms from five to 25 years and the borrowing can be taken out on an interest only or capital repayment basis. Interest rates start from 2.25%, but a rate of between 3-5% is more common.
This flexibility means that commercial mortgages are an extremely cheap way of borrowing money in terms of the monthly repayment. Low-interest rates and a long-term mean low repayments, but the interest will add up over the years and you may well end up paying more back in the long term.
Commercial mortgages are usually available for up to 65% of the combined business and property value, or 75% of the property, without the business. This depends on the chosen lender and hotel in question. The commercial mortgage process takes a lot longer than the options above and you will not usually receive your money for six to eight weeks.
The process involves a property survey and a full legal process, meaning there are costs that must be paid before funds are received. If funds are particularly tight, this can be risky as if the application is unsuccessful, you will be spending money with no return.
ABOUT THE AUTHOR – Gary Hemming
ABC Finance Ltd is whole of market specialist finance brokers, offering commercial, bridging, development and buy to let funding. It is an FCA regulated company and has been established for 17 years. A family run business, ABC Finance has a management team made up of a father and two sons. Gary started his working life at ABC Finance, but then moved to London for a period of time – in doing so furthering his skills and development at some of the UK’s most established firms. He returned to ABC Finance in 2010 and now plays a vital role in the family management team.