Finance for pubs, restaurants and cafés: your options

A café needs a second espresso machine. A pub needs new cellar cooling. A restaurant is ready to refit after eight years of wear. A landlord is offered the freehold of the building they've traded from for a decade.

Each need suits a different kind of funding. This guide takes the common needs in turn, explains the options for each, and is honest about the ones that cost more than they first appear.

Why hospitality funding is different

The sector has features that shape every application:

• Takings swing. Weekends, school holidays, the weather and the run-up to Christmas all move the till. Funding with fixed repayments has to be affordable in your quietest month, not just your average one.
• Much of the money comes in by card. That gives lenders a detailed, daily record of your trading, and it makes products repaid from card takings possible.
• Much of the value is in fixtures and the lease. Many venues don't own their building. What a lender can take as security is often the equipment, a director's personal guarantee, or nothing at all.

Kitchen, bar and catering equipment

If you need equipment, start with asset finance. The lender pays the supplier and you repay over the time you use the kit, usually a few years. Because the equipment itself helps secure the deal, asset finance is often easier to get than an unsecured loan of the same size.

A lot of hospitality kit is fundable this way: combination ovens, ranges and extraction, commercial dishwashers, refrigeration and cellar cooling, coffee machines, ice machines, beer lines and dispense equipment, and till and EPOS systems. Lenders prefer branded, standard equipment with a second-hand market, because they can sell it if things go wrong. Bespoke or heavily installed items are harder to fund.

The two main forms are:

• Hire purchase. You normally pay a deposit and the VAT up front, then fixed instalments, and you own the equipment at the end. It suits kit you'll keep for years, like an oven or a cold room.
• Leasing. You rent the equipment, with VAT added to each rental, and never own it. It suits kit you'll want to upgrade, like EPOS or a coffee machine, and spares you the up-front VAT bill.

Tax and VAT work differently for each, so read hire purchase vs leasing and ask your accountant. Some drinks suppliers and coffee roasters also provide equipment as part of a supply agreement. That can be good value, but check the minimum purchase terms and what happens if you switch supplier.

Refits and refurbishments

A refit is part equipment and part everything else: building work, flooring, lighting, furniture, decoration and fees. The "everything else" is what lenders call soft costs. It has little or no resale value, so many asset finance providers won't fund it, or will only fund it at a higher cost.

The usual answer is to split the bill. Put the equipment on asset finance, and fund the rest with a business loan, typically over two to five years.

An illustration. A café plans a £45,000 refit: £20,000 of new kitchen equipment and a coffee machine, and £25,000 of building work, seating and decoration. It puts the £20,000 of equipment on hire purchase over four years, so it owns the kit at the end. It funds the £25,000 of works with a three-year unsecured loan. The kit's term matches its working life, and the loan for the works ends well before the next refit is due. These figures are an illustration, not quotes: your terms depend on your business.

Check whether the first repayments fall while the works are disrupting trade, and budget for overruns.

Merchant cash advances: useful, but know the cost

A merchant cash advance (MCA) gives you a lump sum, which you repay as a fixed share of your future card takings until an agreed total has been paid back. In a busy week you repay more, and in a quiet week less. For venues where most customers pay by card, that flexibility is genuinely useful.

Be clear-eyed about the cost, though:

• The cost is fixed on day one. It's set by a factor rate, a multiple of the advance, rather than an interest rate. Repay quickly in a strong summer and the cost in annual terms rises sharply.
• It's usually one of the more expensive options. For a planned purchase with a predictable payback, a loan or asset finance is often cheaper.
• Collections start straight away. If you take an advance at the start of a quiet season, the split comes out of your lowest takings.
• It isn't regulated lending. The FCA doesn't regulate MCAs as credit, so read the agreement carefully.

It can make sense for a short, urgent need when a loan isn't available in time. Read how a merchant cash advance works and compare the total you'll repay before you sign.

Quiet seasons and uneven weeks

A seaside café may take most of its money between Easter and September. A city-centre bar may go quiet in January. Neither is failing, but both need to plan.

• A revolving credit facility or overdraft lets you draw what you need in the quiet months and clear it when trade picks up, paying interest only on what you use.
• A short-term loan suits one predictable gap, such as getting through January, provided repayments are timed around your trading.
• Supplier terms from wholesalers can ease the restocking bill at the start of the season.

The rule is the same as for any seasonal business: the funding should end when the busy season has paid it back.

VAT and tax bills

Much of what hospitality sells is standard-rated, so VAT bills can be large. If one lands after a quiet spell, you can ask HMRC for a Time to Pay arrangement, or take a short-term VAT loan of a few months. Act before the due date, because penalties and interest start soon after it. Our guide to borrowing for a VAT or tax bill compares both.

Buying a lease or a freehold

What you're buying decides the funding:

• Buying the freehold of your premises, or a freehold venue with its business, is usually funded with a commercial mortgage. Expect to put in a deposit, often 25% to 40% of the price. For trading businesses such as pubs and restaurants, valuers and lenders often look at the business's trading record as well as the bricks and mortar. See commercial mortgages explained.
• Buying a leasehold business, where you take over the lease, fittings and goodwill, is usually funded with a business loan or acquisition finance, often alongside your own money. There's no property to secure against, so the business's track record and the remaining lease term carry a lot of weight.

If you run a tied pub, your agreement with the pub company may affect what you can borrow against and what needs its consent. Check before you apply.

Comparing the options

What lenders look at

Expect questions about:

• Card takings and bank statements. Usually the last three to six months, and up to a year for seasonal businesses, so the lender can see your quietest months as well as your best. Some will ask for card terminal statements.
• Your premises licence. For a business selling alcohol, lenders will want to know the licence is in place. Problems with the licence or enforcement action are a serious concern.
• Your lease. How many years are left, the rent, and when the next rent review or break clause falls. A lender is unlikely to lend over a term longer than your right to trade from the site, and a short remaining lease can limit what's on offer.
• Accounts and management figures. Your latest accounts, and recent management accounts if your year end was a while ago, showing gross margin and wage costs.
• Your experience. For a new venue or a takeover, your own track record in hospitality matters.

If you trade as a sole trader or small partnership and borrow £25,000 or less, the lending is regulated by the FCA, so fewer business lenders offer it. Lending to limited companies and LLPs is generally unregulated.

Common mistakes

• Funding everything with one product. Putting equipment on a short unsecured loan, or a refit on an expensive advance, usually costs more than splitting the bill.
• Testing affordability in an average month. Fixed repayments must work in January as well as July.
• Borrowing for longer than the lease. If the lease ends before the loan, you could be repaying for a venue you no longer trade from.
• Stacking cash advances. A second advance on top of the first can take a large slice of every sale.

Questions people ask

Can I get finance for catering equipment?

Yes. Commercial kitchen, bar and coffee equipment is commonly funded with hire purchase or leasing, where the equipment helps secure the deal. Branded, standard kit with a second-hand market is the easiest to fund.

Can a pub or restaurant get a business loan?

Yes, though some lenders are more cautious about the sector than others. They'll look closely at your card takings, accounts, licence and lease. Directors of limited companies are usually asked for a personal guarantee.

Is a merchant cash advance a good idea for a restaurant?

It can be for a short, urgent need, because repayments rise and fall with your card takings. But it's usually one of the more expensive options, and the cost is fixed from the start. Compare the total you'll repay with a loan or asset finance first.

Can I get a loan to refurbish my café?

Yes. A refit is usually funded with a business loan for the building work and decoration, and asset finance for any equipment. Splitting it this way is often cheaper than funding everything with one product.

How do I finance buying a pub?

A freehold pub is usually bought with a commercial mortgage and a sizeable deposit, with the lender looking at the pub's trading as well as the building. A leasehold pub is usually funded with a business loan and your own money. Your experience and the pub's trading history will carry a lot of weight.