For businesses in the hospitality and leisure sector, opting to undergo a refurbishment is a great way of refreshing the business. Whilst it shouldn’t be the central pillar of a business plan, it’s certainly worth considering. However, recent high-profile casualties in the restaurant sector have caused some businesses to be wary of the financial risks posed by this kind of work.
Despite this, there are a number of funding options available to hospitality and leisure businesses, each with their own merits and disadvantages.
Financing a refit options
The most preferred option for financing a refit is often by using bank debt. Most businesses in the sector have assets, for example, the freehold on a property. These can be borrowed against, putting the organisation in a favourable position with the banks. Lenders normally assess business loans on certain criteria and will normally lend up to 75 per cent of the total value. They want to have proof of security and be certain that the borrower will be able to keep up with repayments. As such, secure revenue and demonstrable, strong cashflow are essential.
Funding from their own cash reserves is also a popular option, if funds allow. However, any business looking to go down this route must consider future cashflow implications, particularly what this may look like in the future, once a large lump sum has been invested in improvements.
The nature of many businesses in the sector means that it’s often family and friends who are turned to for a loan when carrying out a refurbishment. This can work for some but caution must be taken, especially around the risks posed by future breakdowns in family relationships. If this route is chosen, it’s important that the money is treated as a proper business loan, with agreements in place detailing any repayment terms or interest rate charges.
If the business is run through a company structure, refits can be financed through the issuing of shares. However, for shareholders, this involves giving up part of their ownership and retaining as much of the shareholding as possible is normally a priority.
For works where people are purchasing a tangible asset, such as kitchen equipment or furniture, hire purchase is an option. This is not applicable to infrastructure costs. There are no restrictive covenants around this and agreements are easier to obtain. This option can also be beneficial as it sets up a timeline for refurbishments, matching with the agreement timescales.
Grant funding can also be an option, particularly if the business is creating employment or is part of a regeneration area. However, there is no hard and fast rule about availability and finding information about this may also prove difficult.
Capital allowances, a form of tax relief, are also available on many things acquired during a refit, as opposed to any spending classed as capital costs. However, calculating what is eligible and what is not can be tricky and often the services of a specialist firm are required to assist with this process.
You know the how but when should you finance your refit?
Timing should be an important consideration for hospitality and leisure businesses planning a refurb. If undertaken before year end, tax relief will be claimed in the current tax year; if carried out after year end, these will fall in the following year. Whilst this is useful to know, it’s worth remembering that there is a limit to how much tax relief you can get, which changes every year.
For more information about how and when to finance a refit for your hospitality and leisure business, contact Menzies Partner Dave Gosling by phone on 01489 566703 or by email at DGosling@menzies.co.uk.