How to borrow money from banks
– The Basics
By Nigel Chapman
Banks and other debt providers look to lend money securely, with a clear path to seeing their interest met, and the loan repaid, when due.
A great deal lies behind this seemingly simple phrase, which is fundamental to whether you will be successful in securing the funding you require.

Money Laundering, UBO’s and more
However, there is more to the picture, as banks are now required to undertake extensive due diligence on new customers, to ensure that they are bona fide. Any uncertainty will stymie a loan application.

If your business is controlled by non-UK residents, in whole or in part, make sure that you have the business ownership very clearly laid out. Establishing the UBO (ultimate beneficial owner) is crucial for the bank, to satisfy its own compliance requirements.

If this situation may apply to you – get the ownership credentials totally transparent before going anywhere near launching a loan application.

Management Team
If you are new to the bank their first step (the ML checks will come later), will be to appraise the management team and seek to understand how the team is structured, and quite frankly to decide whether they wish to bank them. Track record (particularly with the bank) is vital here. The bank wants your business to succeed and realises that there may be not so good, as well as the good, times and will try and appraise the teams integrity, as well as its ability to deliver the outcomes being projected.

In particular, both the CEO and the FD will come under the microscope and if your management team is in any way under par – have a think about how this looks to the bank (as well as, of course, to you)?

Also, you will need to spend the time making sure that the bank is clear exactly how your business operates and that its conducted in a professional and trustworthy manner.

Macro Events
On the macro side, take some time to how your hotel business will survive and prosper when times are tough? We seem to be experiencing a whole series of challenging macro events – and this is unlikely to go away. Branded hotels are much easier for banks to get their heads around, as they feel that they have some well grooved metrics to rely upon, and may well have experience of the brand, in other locations.

Independent hotels face a much steeper hill to climb in educating the bank that your hotel has been carefully positioned in a part of the market where the business will thrive and prosper, and ideally not be very overly susceptible to blips in the economy, or other forces beyond your control.

Development
It is likely that, at some stage, if not right now, you will be looking for the bank to help fund with development or subsequent expansion and/or refurbishment of your hotel(s)? Development is perceived as a huge area of risk for a bank (and investors too). Inexperienced developers can bankrupt a hotel, even before it even opens, and even small % overruns or delays can put a serious strain on cash flow.

Banks know that ‘cash is king’ – and if the operating cash flow stops flowing or is constrained by poorly controlled development – this can kill the business. One situation banks take particular exception to is where a development project overruns in cash terms, and the customer then looks straight to the bank to cover the overspend.

The bank will look very carefully at your development and trading plans and may well insist that a third party ‘monitoring surveyor’ reports to them directly during the construction process, prior to drawdowns. They may even wish to commission a third-party report to comment on the viability of your business plan.

It is the invariable rule that the bank will require you to commit 100% of the cash you are injecting, to be spent before they bring in their cash.

Next time… The form of your application, managing your relationship with your bank.
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