The 5 Essential Types of Finance Available for the Hospitality Sector

Types of Finance Available Hospitality

If you own a hospitality business, it's important to be aware of the financial options available. Knowing what your financing options are will help you stay ahead of local competition and ensure that you have enough working capital for renovations, rebranding or relaunching efforts when the demand shifts. Although there are a wide range of types of quick business loans available, the main five types of finance used within the hospitality sector are:

Short Term Loans

The key advantage of this type of finance is that they can help cover borrowing needs with shorter repayment periods. They are an effective tool for businesses looking for a short term cash boost without committing to long term loan repayments and tend to have terms under 1 year. Anything over 1 year wouldn't be classed as a short term loan.

Short term loans can be used for any legitimate business use, from purchasing inventory to restock supplies, marketing or paying unexpected invoices. They are often easy to apply for, many with minimal paperwork required and payouts within 24 hours of acceptance.

As short term loans tend to be on an unsecured basis, they can be an attractive option for businesses that lack assets, don't want to provide security, or need funds quickly. Typically, short term loans will require Personal Guarantees and Indemnities from the business owners.

Typical Short Term Loan Terms

Borrowing amounts: from £2,000 – no maximum but credit depends upon status

Length of terms: 3 months to 1 year

Asset Finance

Asset-based lending is one of the most popular types of finance used in the hospitality sector. It offers a great deal of flexibility by allowing you to purchase new assets or use your existing business assets - such as vehicles and equipment - as collateral to secure additional funding.

When using asset based lending there are 3 main options available to you. HP, Finance Lease and Operating Lease, and which one that is the best fit for you will depend the type of asset and your borrowing requirements. In addition to purchasing new assets, you can refinance existing eligible assets, which can provide a injection of cash. The amount you can borrow will depend on the current market value of the asset(s) as well as the financials of the business.

Typical Asset Finance Terms

Borrowing amounts: from £5,000 to £50 million

Length of terms: 3 months to 5 years (up to 7 years for some types of assets)

Typical Asset Refinance Terms

Borrowing amounts: minimum £25,000 to £50 million

Length of terms: 3 months to 5 years (up to 7 years for some types of assets)

Refurbishment Finance

From materials to labour costs, refurbishment projects can be expensive and require careful planning. Many hospitality businesses will look to secure finance for refurbishment projects in enable them to increase spending and reduce the impact on their cash reserves.

Using finance can help businesses to increase spending while spreading the cost of manageable monthly payments.

Typical refurbishment Terms

Borrowing amounts: £2,000 to £500,000

Length of terms: 3 months to 6 years

Commercial Mortgages

Commercial mortgages can be a good source of finance which is secured on commercial land or property. It is a go to option for many companies in the hospitality sector as it allows increased spending power for property purchases.

Many companies will opt to purchase their premises to give them full control over its uses, reduce expose to violate rental markets and build up their business assets.

In addition to mortgages for new purchases, you are also able to release equity in commercial land or property by re-mortgaging. The amount of funds you can release will depend on loan to value amounts.

Any equity release can be used for a variety of purposes, such as property developments and refurbishments. The loan will be secured against the land or property being as security for the mortgage.

Typical Commercial Mortgage Terms

Borrowing amounts: £100,000 to £10m

Length of terms: Up to 25 years

Cash Flow Loans

Cash flow loans can be a good option for companies that are experiencing a lull in cash flow. They are commonly used by businesses that are affected by seasonal trading and need a quick cash flow injection.

Using cash flow loans to cover short falls in ready cash can be a useful tool but are not intended to be a long term solution. Most cash flow loans have fixed monthly payments which enables companies to effectively plan their monthly budgets while remaining competitive and functioning efficiently.

Typical Cash Flow Loan Terms

Borrowing amounts: £2,000 to £500,000

Length of terms: 3 months to 6 years

Minimum Eligibility Requirements

If you're applying for business finance, it's important to carry out research into different lenders, selecting one that specialises in your market sector. It is equally important that you have a clear understanding of their eligibility criteria before applying.

All lenders will look at the same key conditions:

  • You're 18 years of age or older
  • You're a current UK resident
  • You have been trading for more than 12 months
  • You are a UK registered business
  • You pass credit checks
  • You pass affordability checks
  • Your business is financially stable
  • What the funds will be used for
  • How the funds will benefit your business

How much emphasis that is put on each of these factors will vary between lenders, which is why research can have a strong factor when applying to such facilities.

As with any business decision, proper research is extremely important when applying for business finance. You need to make sure you are applying in the right place, for the right loan and ensure you can afford to repay what you borrow without negatively impacting on your businesses finance stability.

Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.

Updated: Mar 01, 2023