Financing a small business or start-up in the hospitality sector

Starting your own business in the hospitality sector can be a daunting experience; choosing the right location, shop fittings, suppliers and route to market. Often it is difficult to get ideas off the ground without a bit of funding, so Stir it Up sought the advice of Graham Davies, CEO and founder of Addition, a financial services firm who have provided over 180 SMEs with guidance and support, many of whom are in the hospitality sector.

What are the financing options available for small/start-up businesses in hospitality?

This depends on your approach. If it’s equity funding, you can access angel investors or use crowdfunding. Debt funding is another possibility, with business loans or sale and leaseback as options. Other potential finance options include grants and schemes, invoice financing, R&D tax credits and Innovate UK (for eligible businesses).

What do you have to have in place before seeking financing?

Whether you choose a loan, equity/reward fundraising or grants and schemes, it’s important to have to hand your turnover and profit, trading history, payment history (including any late payments or CCJs) and detail for the purpose of the loan.

How do you determine the best financing option for your business?

The first step is deciding what you’ll use the money for. Grants and schemes, for instance, often have specific criteria to meet. Business loans are ideal for launching new products or services, whereas invoice finance helps keep cashflow strong. Once you know exactly where the money is going, you’ll be able to choose the best option. 

When is a crowdfunding campaign appropriate and how can businesses start one?

There are two types of crowdfunding: reward-based and equity-based. If you need capital to get things started, reward-based crowdfunding might be best. It’s easy and cost-effective to send a free e-book or a voucher for future sales to contributors. Kickstarter and Indiegogo are great platforms for this. Equity crowdfunding is more suitable for businesses that are already established and can demonstrate a growth trajectory. In this case, platforms like CircleUp, Seedrs and Crowdcube will work for you. 

What should people look for in an investor?

It’s vital that any potential investors share your vision for the company’s future. They should have a strong network they can leverage on your behalf, as well as some experience in your sector. They should also fit with your general brand culture and trust in your team. 

What are the risks involved with financing?

Affordability checks are there to protect borrowers, however there are always risks if circumstances change. Your business could be declared bankrupt or go into liquidation. If you’ve taken a grant, HMRC could claim the money back from your business if you don’t use the money for its intended purpose. In order to protect your personal assets, it’s essential that all financing is associated with your registered business or limited company – otherwise you could end up footing the bill personally if things go wrong. Having a competent financial advisor on board can prevent any issues from the get-go, so it’s worth finding someone you can trust.