Funding the development of a rural tourism business can be a minefield. Here rural mortgage consultant Jim Richards shares his tips for securing finance.
There are many reasons why you may think commercial lending by mainstream banks will be a non-starter for a rural business and, for an unprepared loanee, the banking landscape can be a minefield.
Most banks operate in a very narrow range of parameters at the exclusion of many sound businesses. If you have a set of accounts that demonstrates that you can afford the debt historically then you’ll be ok, but how many start-up, fledgling or expanding businesses are in this position?
Then there are the challenges banks present themselves, many of which don’t promote that they can fund an array of leisure enterprises. Add to that junior staff replacing ‘seasoned specialists’, decisions made by remote, risk averse underwriters, regular changes in lending policy and a restricted loan to value for new enterprises (the standard response is 50-60%, but in our experience 70% max is the norm), then the lending market can be a minefield for customers trying to seek funding on their own.
There is also differing lending policy depending on whether the enterprise is deemed to be agriculture/farm diversification or purely leisure/hospitality. This difference can determine the term of the loan from 15 (for leisure) or up to 25 years (for agriculture/diversification). It can also determine the business surplus required to cover mortgage payments by x1.5 for agriculture or x3 for leisure.
Avoiding ‘computer says no’
So how to avoid the ‘computer says no’ scenario? Once a bank has formed an opinion on your proposal you are unlikely to get a second chance, so how to approach things at the outset? You could use a rural mortgage consultant or, if you want to go it alone, here are some top tips:
• Prepare well in advance
• Get your financial house in order
• Establish your team – accountant etc.
• Research and identify borrowing guidelines so that you know what the challenges are and what your business has to look like in order to attract funding
• Establish your borrowing ability against your resources and business performance both now and in the future
• Put in motion steps and a time frame in which to engineer your plans
• If you have no experience in the sector it’s important that you consider how you can gain experience or how your skills can be applied. Banks weight this heavily and often to the negative if you don’t have experience.
Toolbox for success
Getting your financial house in order is essential as this will determine the probability of the success of the funding request. Here are a few ways in which you can equip yourself:
• Accounts carry a lot of weight. Unfortunately, they are rarely accompanied by any narrative as to what has happened. The story behind the accounts is important to set the business in context of the plans going forward
• Up to date trading performance demonstrates that you are in control and that you know the position of your business at any point in time
• A simple plan. Again, this demonstrates that you know where you are going and have a focus and objective
• Cashflow forecasts explain your vision but in financial terms that lenders will understand – this is often the crux of the proposal
• Adverse credit – this just adds an extra complexity that you can do without. Use your planning time frame to resolve any credit issues in good time
• Pay attention to your bank conduct. Get timings right on credits and debits payments, arrange a higher overdraft if required, but avoid at all costs incurring returned items… it’s just not good!
• Control personal expenditure; know what you need to live on a monthly basis and extract that to a separate account. Uncontrolled/unaccountable drawings is a big factor in undermining the argument for affordability based on historic accounts
• If you have a property to sell or are raising funds from family, then prepare for this sale in good time and talk to the family member. Delays can be critical to success.
Funding Success Magic Number
This is a bit of a trade secret but it’s the principle around which I build every lending case
This is a typical forecast spreadsheet – note the number ringed in red, the ‘net cashflow surplus’
The magic number is this number ringed in red in the table above. It is what we call the ‘net cashflow surplus’ against which we test the mortgage costs. You’ll see that this number is £102K – remember this. Now, here’s the story:
• The test is predominantly based on forecasts
• As mentioned the number is the net cashflow which is the income minus expenditure but before mortgage costs
• By year 3, the forecasts should demonstrate that this net cashflow can cover the mortgage costs by x1.5 to x3 for agriculture or leisure respectively
• The forecasts predict a net cashflow of £102K
• This is a live case and the clients were requesting £220K and at a sensitised interest rate of 6% over 15 and 25 years. Mortgage costs would be £22K and £17K pa respectively
• Factoring in the cover required of x1.5 to x3, the business needed to generate a net cashflow of £33-£66K for 15 years or £26K-£51K
• The business was forecast to generate a net cashflow of £102K, so it passed!
• However, despite the clear ability, only two out of five of the main high street banks agreed a mortgage, with the others citing other factors for declining the application
• We were delighted to have been able to provide the clients with a choice of lending options, but this just demonstrates the challenges of raising funding for this type of enterprise.
• Funding is available to the tourism/hospitality sector
• Finding it can be an issue
• Lending policy can vary and clearly a proposal will live or die on this
• An understanding of lending guidelines is essential to navigate the minefield and a ‘soft’ exercise early on in your plans would help you to hone your plans so that the final version fits bank criteria
• Prepare well in advance with the right financial information and team around you
• Identify potential obstacles and provide the supporting information – the benefit of underwriters is that they are humans and we can appeal to their rationale. If it makes sense they will ‘buy it’.
ABOUT THE AUTHOR
Jim Richards is co-director of R&BS, a nationwide consultancy that specialises in mortgage funding for rural properties.
Founded in 2004, R&BS was created to provide strategic finance expertise to existing rural business owners and those wishing to enter the rural property market, helping them access funding for purchase, expansion and diversification. www.ruralmortgages.co.uk