Financing a Bed and Breakfast
Finance is a big subject and a difficult one to go into in too much detail in a blog. I cover finance in more detail in my course, including how to go about writing a detailed business plan so that you have the most chance of success.
I thought instead, to get you thinking about how you're going to finance your new venture and make sure you can afford it, I'd give you ten things to think about...
1. What's the current turnover?
If you're asking a bank or financial institution to lend you money on an existing business, they will want to know what the current turnover and profit are. Many B&B owners will tell you they are running it as a hobby or on a part-time basis or may be semi-retired. Whilst this may be true, they may already be at the maximum they can achieve out of the business. Many banks will value the business on the turnover and so a low turnover is unlikely to attract much interest unless you have plenty of capital or another source of income.
2. Do you need to live off the B&B?
As above, if you have other sources of income such as a pension, then the B&B income becomes less important both to you and the bank. If you can show that you can afford the bills without the B&B then you'll be in a strong position. This may influence the size of property you therefore look at.
3. Could leasing be the answer?
Do you need to own a property? You could rent the property (on a fixed term lease) and just buy the business. This will help you purchase a much larger business with a bigger turnover and profit. However, unless you're a cash buyer, there needs to be a proven track record of turnover and profit. From a bank perspective this is a risky investment as they have no building to sell if it all goes wrong.
4. Do you have experience?
Banks don't like lending against a B&B business. This is partly because so many people go into the business on a whim with little or no experience. Many businesses fail or for others they didn't realise what they were letting themselves in for and the place is back on the market within two years. They are much happier lending to people who are serious about it and gain experience beforehand. Could you spend six months working in another B&B or hotel? Attending a course like mine helps as you demonstrate not only commitment but also that you have learnt about the trade, marketing, regulations and so on too.
5. Is it a money pit?
Any bank borrowing is likely to want a full valuation on the business and building before they will agree a mortgage. This is likely to cost upwards of £1,200 so you want to be fairly sure of the outcome. Make sure you've checked everything thoroughly, preferably stayed there overnight and know the business well before getting to the stage of spending money. Also, don't overstretch yourselves. Don't use all your money for the purchase then have nothing left to do it up afterwards. It will cost (way) more than you ever think when you move in. During my course we look at doing up just one bedroom and all the things you hadn't considered. Now times that by eight rooms!
6. Do I need to approach more than one bank?
Yes - definitely. In an ideal world you want more than one provisional offer of a mortgage. We approached four banks when moving to The 25. All four made an offer. We then played them off against each other to reduce interest rates and get the best deal which will save us tens of thousands of pounds in interest over the lifetime of a mortgage.
7. What should my business plan look like?
Your bank will want to see your business plan. These vary widely from a hand written one page plan to our 32 page comprehensive typed document with spreadsheets, photos and SWAT analysis. Two banks told us our business plan was the best they had ever seen. I give a blueprint for this in my course to give you the best chance of success. Banks need the confidence that you understand the business you're buying, the market and the trade.
8. Have you considered winter?
Don't forget that many B&B businesses are located in seasonal areas. We close during December and January as these months are so quiet. Other months can be fairly quiet too. Bear in mind that your bills and mortgage will still need paying when you may have no income at all. Your income in the summer not only needs to be large enough to pay the bills in summer, but you need to end the season with enough in the bank to see you through to when the next season really kicks off again.
9. Should I get advice from an accountant?
Yes - most definitely. Even if you're proficient in looking at and understanding a balance sheet or a profit and loss account, the accounts of a B&B may not be all they seem. There are so many elements added and subtracted that they don't always tell a true picture at all. Did you know that as the owners live on site and off the business (eg eating the same food in the fridge), an amount of the expenses are added back to allow for personal expenses so that you pay tax on these as they're not business expenses? The figures are often pre-VAT - will you operate under the VAT limit? If so this may not be relevant. Check exactly what's included and what isn't. Are their phones, car, clothing, food, nights away, petrol, all in the accounts and how would your situation differ?
10. Should I be VAT registered?
If the business is already VAT registered then it's less of a concern as I presume you'd wish to maintain at least the same level of business. If the owners are stifling the business by staying just under the VAT limit then there may be scope to go over the annual limit and become VAT registered, thus giving you the opportunity to make more money. However, consider the implications carefully. Once you go a pound over the limit, you pay VAT on everything. Say the limit is £85,000 a year. If you do £90,000, you'll have a potential VAT bill of £15,000 (at 20%). That means you're worse off by £10,000 had you shut the doors and not taken anyone after you reached £85,000. However, if you made £115,000, you're making more money and it's worth being VAT registered. Another consideration is the flat rate scheme. If you are not on it, you can offset some of your VAT bill be claiming back VAT on your expenses, however, most food you buy will be 0% rated and the VAT on your outgoings will never be that high unless you're doing a major refurb - more on this in my course. Alternately, an easier form of VAT is the flat rate scheme where you can't claim anything back, but you only pay 10.5% VAT instead of 20%. Definitely something to consider carefully. Again - take advice from your accountant. (VAT rates vary over time so these figures may be out of date - please check current rates at www.hmrc.gov.uk).
