Purchasing and owning a pub is a long-term investment that can provide substantial dividends, but sourcing an appropriate financial solution is vital in order to generate a profit. Pub freehold and leasehold finance can provide an ideal funding source to enable healthy growth and long-term sustainability, but investors and publicans alike must first understand the nuts and bolts of this type of finance.
As with all financial products it’s vital to find a loan that works for you; while many lending products can be tailored to meet your specific circumstances there are still some key responsibilities held by the borrower. Foremost amongst these is the securitisation of the loan against the borrower’s assets; in pub finance, this generally means a charge taken out against the pub itself. Consequently, the borrower stands to lose their property if they fail to keep up with repayments, so the affordability of a loan must be carefully considered before entering into any commitment.
Financing the purchase of any property can be a difficult business because of the need to obtain a large amount of money in a short space of time. Mortgage providers are notoriously shy of approving long-term loans for the purchase of commercial properties, so it can be very difficult for publicans to purchase a pub without jumping through hoops. This process often takes several weeks and even months, which is long enough to put a dent in the growth plans of any business. Rather than resorting to mortgages and mainstream finance, publicans and pub buyers must turn to a faster, more flexible form of finance.
Purchasing the freehold or a long leasehold on a pub can be done quickly and securely through the use of bridging finance, a specialised form of lending that’s designed to kick-start projects without the need for lengthy application periods. Typically a bridging loan will be used to complete the initial purchase phase of a deal and any follow-up investment that needs to be made; once this is completed, a long-term financial solution such as a mortgage will be put in place. Because the initial purchase is completed using a short-term loan, this type of borrowing has come to be known as “bridging” - the money is used to bridge the gap between making a purchase and acquiring the long-term funding to finance it.
Bridging finance is an exceptionally powerful tool for investment because it is highly flexible. Unlike mortgage providers, bridging lenders can work to an exceptionally short time period and regularly turn loans around in under a week (in extreme cases, bridging loans have been put in place in as little as 24 hours). This is achieved by cutting back on paperwork and middlemen - the lender will still conduct a thorough property valuation and an assessment of the borrower’s financial stability, but this all takes place in a much more compressed timeframe. The speed with which bridging loans can be arranged enables investors to proceed quickly and confidently with their plans, safe in the knowledge that their funding is secure.
The application process for a pub purchase loan is somewhat more involved than that for a straightforward property purchase. This is down to the fact that a pub is more than a simple property development; it is a business as well, and the ongoing profitability of this business will have an impact on the borrower’s future repayments. If the pub fails just a few months after opening it’s going to be difficult for the lenders to recover their money, so before any application for this type of finance is approved the borrower will need to demonstrate that they have the experience to successfully run their pub. This doesn’t mean that only a landlord can apply for a pub loan; any investor can, as long as they have a team onboard who have the expertise to ensure the pub is properly run.
An important aspect of any application for finance is the fee and repayment structure that’s set out at the beginning of the loan. Because of the superior adaptability of bridging lenders it’s possible for their clients to make use of a wide variety of different loan types and terms. Foremost amongst these is the ability to “roll up” the costs of the loan; the entire cost of taking out the loan can be deferred until the loan comes dues, which means there is no ongoing cost to the borrower at all. This is highly valuable when investing in a business which takes several months to become profitable, and with a new start-up pub (or one in need of renovation) it can be essential to minimise overheads in the first year of operation. Bear in mind that rolling up a loan’s costs generally drives up the overall bill, and this option can sometimes be more expensive in the long run.
The length of time over which the loan is taken out also plays a major role in the costs of taking out this finance option. While it may be cheaper in the long run to repay the loan as quickly as possible, this can also drive up the costs of making monthly payments. It’s wise to carefully consider the trade-off between repaying a loan as swiftly as possible and minimising the running costs of the pub when deciding how long to take out a loan for. The most common terms available for bridging finance range between 1 and 12 months, though there are plenty of specialists who can offer shorter or longer terms than this.
Bridging finance presents a valuable set of tools for pub owners and investors to create a financial solution that works for them, but it’s important that they fully appreciate the power of bridging to create a fully bespoke funding source. By carefully analysing their financial situation it’s possible for borrowers to create a lending package that enhances their business performance, but this is only possible with a thorough grip of their situation and future business objectives.
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