Financing a pub: the options
There are many options and providers when it comes to financing the purchase of a pub.
When you’ve settled on a pub you want to buy or lease, it’s a great idea to speak to an independent financial advisor (IFA). Ask them if they can recommend any accomplished independent financial advisers that specialise in pub financing, or they may be able to help you directly.
The finance options available to you will depend on not just your individual circumstances, but also on the type of pub arrangement you’re looking to get in to.
Who provides funding?
Banks and other commercial lenders are the most common sources of finance for pubs and often have access to government schemes that incentivise them to lend to smaller borrowers. It’s worth keeping in mind that there are various alternatives to traditional lending that your circumstances may be suitable for.
How can I give myself the best chance of securing the funding I need?
Get the three ‘Ps’ right – planning, personal finance and previous track record – and you’ll put yourself in the best position possible to get the funding you want, and on reasonable terms.
Securing finance is mainly contingent on lowering the risk for the institution lending you the money and shoring up their return.
A PubCo or commercial lender will want to be confident that they’re going to get their money back with interest, so they prefer to hand over a loan to someone who has previously ran a pub (even as manager), has some personal finance (a holding stake) and has a convincing business plan.
However, it’s important to note that even without all of these ‘golden trifecta’ attributes, you’re still in with a chance.
Failing to plan is planning to fail, and anyone holding the purse strings will know this. A well-formed and achievable business plan will be looked at favourably.
If the pub has underperformed prior to you taking over, then show how you’ll avoid a recurrence of the same issues to allay the lender’s fears of continued decline.
The three Ps are in no way exhaustive, as lenders will look at a complete representation of you and your circumstances.
Known colloquially as ‘having skin in the game’, most lenders will want to see that you’re taking a financial risk too. You can either put up cash from your bank account or leverage an asset, usually your house.
This isn’t limited to previous experience of working in pubs. If you’ve accrued experience across hospitality, retail, management or other customer-facing roles, you’ll want to mention that in your application and almost certainly in your business plan.
These credentials will give you a clear advantage over someone who has neither worked in pubs nor these industries.
The rate, payment schedule and conditions will vary from lender to lender and depend on your personal circumstances. Generally speaking – and if you’re someone with a viable plan, some personal finance and experience or transferrable skills – you can expect to see a rate around 3-4% above the Bank of England base rate, and a payment term of 15-25 years for freehold or, for a leasehold, lasting until the lease expires.
Buy a freehold and you’ll be purchasing the building, so you’ll have an asset to use as part of a commercial mortgage or secured business loan. This makes you a potentially attractive proposition to banks and other traditional financial institutions.
You may be able to seek as much 80% of the value, and can expect to pay a slightly higher rate than if you were operating leasehold premises.
Although most freeholds don’t involve a ‘tie’, in some instances you may be able to negotiate finance from a brewery or PubCo in exchange for one.
With a leasehold, you won’t be purchasing the building, just the lease on the property, which won’t be enough to act as security for most traditional institutions. Your experience, business plan and personal finance are instead the key to accessing funding.
As you’ll likely have a tie to a brewery or PubCo, you may have access to loans directly through them, as their success is tied to yours.
You can expect a brewery or PubCo to keep a close eye on your business, and they may expect you to commit to stocking certain beers and other terms and conditions to be eligible for a loan.
As a manager or tenant, you should be able to acquire improvement loans (or grants) directly from the landlord, be it a PubCo or brewery. The PubCo or brewery retains tight controls over their pubs, so these cash injections are only likely to be released if there’s a very strong supporting case for them.
Start-up costs for tenants are lower than for any other pub ownership model, but the drawback is that you’re tied to selling only the beer brewed by the brewery or fixed by the PubCo.
Alternative finance options
Banks, PubCos, breweries and personal finance providers are considered the mainstream providers of finance to pubs. But there are alternatives that may be viable in the right circumstances.
Do you have an idea for an innovative pub concept that’s likely to attract an army of small investors? Is your business plan realistic and premised on strong evidence that such a concept would be in demand in the location proposed?
If the answers to both question are yes, and if you’re digital-media savvy (or have access to someone who is), then you could offer rewards, equity or another incentive in exchange for a large number of (usually) small financial pledges.
Platforms such as Kickstarter, Indiegogo and Crowdcube are three of the biggest crowdfunding platforms, collectively attracting around £4.8bn in funds since their inception, but there are alternatives. You can find a fairly comprehensive list here.
Although you can’t use invoice factoring to buy a pub, it can boost cash flow once you’re operational and if you have debts or invoices outstanding.
Factoring is the process of selling off debt repayments due to another company (a factor) at a discount. This ‘factor’ will then pursue the repayments with debtors directly.
This process can help you generate funds quickly, but you may need to accept a steep loss when selling them off.
Community funds are modest sums awarded by various public, private and charitable bodies. Whether it comes in the form of a loan or a grant, each award will have its own particular terms and conditions attached.
If accepted, you can expect comparatively favourable rates and terms, as community funds exist to promote businesses that benefit the community, environment or disadvantaged groups.