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Funders Keepers: tips on funding and finance for bar businesses

This article was originally published in the July issue of Bar Magazine, featuring commentary from Steve Cordiner.

You have the idea but where do you find the funds? Opening a new bar, or refurbishing an existing one, is a major outgoing but there is a variety of different ways to turn your dream into a reality.

For operators of smaller bars in particular, private investors or co-venturers who know the business well are often the most popular and flexible source of funding, according to Karen Ozdamar, senior associate in the retail and leisure group at law firm Howard Kennedy. "This funding may come in the form of debt or equity and the investors are unlikely to be as concerned with the seasonality of profits or due diligence as more mainstream lenders." 

However, she notes that banks remain the most common, and often the cheapest, source of debt funding. "Many banks make an active effort to support SMEs - albeit that for bars, which often do not own the property that they use, proving their ability to repay a loan can be a challenge. Other options may include alternative finance providers such as peer-to-peer lenders or even crowdfunding."

When it comes to refurbishing a bar, Karen says it is likely that only finance from private investors and more mainstream banks will be available because others would be unlikely to view it as an optimum opportunity for a return on their investment. "Regardless of the source of funding, the lenders or investors will always be keen to understand whether the proposition of an expanding bar or restaurant business is likely to be welcomed by the market and whether it can be rolled out on a wider scale. The bottom line, whether funding an expansion or refurbishment, is whether or not the business has the right characteristics and management team to thrive in an increasingly competitive market." 

Choosing the right type of funding is very important to managing cost and driving growth for your bar business, says Steve Cordiner, investment director at mid-market private equity firm Livingbridge. Private equity enables you to either take some money out of the business or inject the cash needed to help the business grow and it also gives you access to a team of experts to help shape the business strategy for growth, often with a large network to draw from, he explains. "If you select a private equity house with experience in your sector, they will be able to help you ask the right questions to discover how your business could grow. As they are partners in your business, they will also have some influence on how the business is run. For owners and founders, this means that the investment has to go beyond money - you need to find investors where the culture and personality fit with how you want to run your business." 

While bank loans are the most traditional and widely used form of funding for SMEs like bar operators in the UK, there are often limitations on how they can be used, Steve points out. "For example, it's unlikely you'll be able to buy out another shareholder with a bank loan - the funding is normally limited to investment in capital. Another thing to consider is that repayments typically start from month one, leaving a small window to make any significant impacts on revenue."

Peer-to-peer lending is an increasingly popular form of funding for businesses. "It takes the idea of a traditional bank loan and blends it with the contemporary social aspect of crowdfunding to create a hybrid version of the two," Steve explains. "This means that instead of borrowing from a bank, businesses borrow from a group of private individuals through an online platform." However, there can be downsides, he adds. "Often the interest rate can be slightly higher than a bank loan and in some cases peer-to-peer lenders will list your loan on their platform for lenders and if the total amount isn't secured then it will have to be listed again. This can cause delays and complications." 


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Crowdfunding has become increasingly popular over the last decade. Matthew Grant, director at Garbutt + Elliott accountants and business advisers, recommends making sure you choose the correct platform for your goals. "Some have an all-or-nothing funding model, which means if you do not reach your funding goal, you get nothing, while others enable you to keep the funding even if you do not reach your goal," he explains.

One of the main reasons for the continued success of crowdfunding is the tax reliefs that are available, he adds. The Seed Enterprise Investment Scheme helps small, early-stage companies raise equity finance by offering tax relief to individual investors purchasing shares. "The Enterprise Investment Scheme (EIS) is similar but is generally aimed at organisations that are longer established. It offers tax relief to individuals who subscribe for shares in an EIS and is at 30% of the cost of the shares, providing they retain the shares for three years. The relief is then set against the individual's income tax liability for the tax year in which the investment was made. If investment can be secured through either incentive, it is a win-win situation, as businesses access the equity required and the investor benefits from tax reliefs. However, as with all tax matters, specific advice should be sought at the outset, as the rules of each scheme are complex and there are a number of pitfalls to negotiate in order to ensure the investment qualifies." 

Whatever route you take, Matthew points out that potential investors love a good story. "Sharing your story, including who you are, what you want to do and, perhaps most importantly, why you want to do it, is vital." It also pays to keep it simple, he says. "Potential investors want to see a clear vision and business plan before backing any venture so it is important to be as clear as possible about everything from the amount of money required, what will make the venture stand out from competitors and what is being offered to investors for their money." 


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For bar operators that suffer from seasonality, it pays to plan ahead for short-term funds, notes Steph Brown, senior funding manager at Ashley Finance, a specialist in lending to SMEs, including the food and drink industry. "You may be planning for a quiet period but have a particularly busy month that might see new staff hired and a need to invest in stock. This disconnect between revenue and spend can be problematic for the bar industry and can have a massive impact on its operation. My advice to you would be to plan ahead and don't be afraid to seek help. 

"Ask yourself, when in the year am I going to need to invest? Put the time in and search the market for a finance provider that really understands your industry - one that appreciates why your income fluctuates and can lend you money on terms that make sense in your sector. Be it a loan for new furniture or invoice finance to pay the wages in those quieter times, making sure you have the right funding partner in place is key to profitability." 

Despite a government pledge to introduce measures to help mitigate the burden of business rates, they are set to remain a cost challenge and have an impact on profitability and cashflow, says Steve Last, area director for hospitality, hotels and leisure at Lloyds Bank Commercial Banking. "Growth in the pub and bar sector has been relatively flat in recent years. With tight margins and higher staffing costs, management teams have had to work harder to build scale," he explains.

"What's important is that operators remain hungry for growth opportunities. This could be through refurbishing existing sites, opening new premises, extending their service offering or introducing new product ranges. Any decision like this needs careful planning and funding solutions, which is why specialist sector teams are on hand to help operators prosper, enabling Britain's pubs and bars to thrive." 



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