The banks, traditionally the first port of call for cash, have seriously tightened lending to businesses in the last four years.
According to a recent survey of small business owners by the Forum of Small Businesses (FSB), four out of 10 firms applying for credit have been refused by the high street banks in the last three months and there are few signs of that situation changing this year.
“It is very difficult to raise finance to purchase a restaurant or hotel in the current climate unless the unit is at the top end of the market, or the prospective borrower has a good track record and can invest a high percentage of the purchase price from his or her own resources,” summarises Tony Hamlin of specialist lender First Merchant.
This attitude means that unless a business has built up large amounts of capital from its existing operation or has a big personality behind it, there’s a big chance it won’t get off the ground.
However, the hospitality sector is a creative and tenacious industry and as we’ve seen recently, many operators are not letting a ‘no’ from the bank stop them from pursuing their dream of launching or expanding an exciting new restaurant concept or a boutique hotel.
Eighteen months ago, first-time restaurateurs Jason and Sophie Coolbaugh had a great idea for a new Mexican restaurant to service hungry workers in Westminster. They knew exactly what they wanted to do and market research suggested the concept would work, but just didn't have the capital available to start it up.
With the bank refusing to lend to them the Coolbaugh's were forced to find an alternative and they did, in the form of credit cards. Between them the couple took out three credit cards, which they maxed-out to £30k to pay for the lease, equipment and stock at Picante Mexican Grill. They used every penny, saving the last £200 as a float for the till.
Although not the most obvious route to financing a new business and one that required a certain amount of scrimping (the restaurant, which is also a takeaway, opened for business with no tables, chairs or menu boards), using credit cards was a viable option for the Coolbaugh's who, as they approach their business's second birthday, are not only debt-free but have managed to build up their workforce to 10 and have extended the business to corporate catering and invested in an online ordering system to help the business grow further.
The problem of gaining credit isn’t reserved for start-ups however. Earlier this month healthy fast food chain Leon announced it was turning to its own customers to help pay off debts and fund its expansion , asking for an investment of between £1,500 and £5,000 for a return of between 10 and 15 per cent in ‘Leon pounds’, which could be spent in its restaurants.
Despite operating 13 sites already and building up a loyal customer base, Leon’s co-founders John Vincent and Henry Dimbleby hadn’t been able to get funding from the banks, so had been forced to come up with its new scheme which it says helps them and their customers: "Savers can't get the rates, banks aren't lending to businesses – and this is despite the government giving them money to do so. So let's cut out the middle man. Our customers regularly send us emails asking us to open near their office or near their home. This is a way that customers can get us there and benefit financially too,” says Vincent.
Customers are already lining up according to updates from the company making it well on its way to achieving its aim of operating another 10 sites in the next three years.
How to finance
Evidence shows that there is confidence in the hospitality sector. People are eating out more times per week than they were a year ago and many hotels, particularly in the capital, have seen occupancy return to pre-recession levels.
The hospitality sector also defied the odds and achieved growth of 1 per cent in the last quarter while it shrank elsewhere.
More than half of the respondents to the FSB’s quarterly survey also said they were planning to grow their businesses over the next year, despite the fact that they were finding it hard to raise capital.
As we've seen from Picante Mexican Grill and Leon - where there's a will, there's a way, so if you are looking to start a hospitality business or grow your existing one, be sure to read BigHospitality's guide to financing a hospitality business first.
We've spoken to experts at banks, specialist lenders and private investment companies to find out how you can secure funding and which one would be best for your business to compile our special feature which will be rolled out this week.
You can find all our articles on the subject as they are published here