Key points
- Hospitality income depends on season, weather and events; costs are largely fixed and fall due every week.
- Deposits and forward bookings look like cash but are owed to guests until the stay or event happens.
- Freehold premises can support secured borrowing at a lower cost than unsecured facilities, with the property at risk.
- Facilities taken during a difficult period can often be consolidated, though a longer term increases the total repaid.
The hospitality cash-flow pattern
A coastal hotel might take half its annual revenue between June and September. A city-centre bar depends on weekend nights and the run-up to Christmas. A wedding venue books eighteen months ahead and is paid in instalments. In each case the shape of income is very different from the shape of costs.
Costs are mostly fixed. Rent or a mortgage, rates, insurance, energy, licences and a core rota cost roughly the same in a wet February as in a sunny August. Energy has become a large and volatile line for businesses that heat rooms, chill cellars and cook all day. Staffing is the biggest controllable cost, but cutting the rota too far damages service and reviews, which damages future bookings.
Deposits and forward bookings complicate the picture. Money received for a wedding next spring sits in the bank now and is tempting to spend on this month's bills. Until the event happens it is owed to the customer and may have to be refunded. A business that spends deposits on operating costs is borrowing from its own future.
VAT adds a timing issue. Hospitality sales are mostly standard-rated, so a fifth of takings belongs to HMRC and is paid over quarterly. A strong quarter produces a large VAT bill just as the quiet period begins. Time to Pay arrangements exist, with interest accruing; see GOV.UK and our HMRC tax debt page.
Sector-specific pressures
- Tied-pub arrangements. Many tenanted and leased pubs must buy beer from the pub company at above-market prices in exchange for a lower rent. The tie limits margin and limits what a tenant can borrow, because the premises belong to the pub company. The Pubs Code gives tenants of larger pub companies certain rights, including in some cases a market rent only option.
- Refurbishment cycles. Rooms, bars and kitchens date quickly. A refurbishment every five to seven years is normal, and the loan for the last one may still be running when the next is needed.
- Licensing. A premises licence under the Licensing Act 2003 is a condition of trading. A licence review can halt income overnight, which is why finance providers ask about it.
- Lease versus freehold. A freehold hotel or pub has an asset to borrow against. A leasehold business has a large rent liability and little security, so it relies on unsecured borrowing and personal guarantees.
Finance options that fit the sector
Refinancing refurbishment debt
A refurbishment loan taken over three years at a rate that reflected an urgent need can often be refinanced once the improved rooms or bar are trading and the figures prove it. A longer term reduces the monthly payment but increases the total interest paid, so compare the whole term and include any early repayment charges on the existing loan.
Secured loans against freehold premises
Where the business owns its building, a secured business loan or commercial mortgage can raise funds at a cost usually well below unsecured products, because the lender has property to recover. It can consolidate expensive borrowing, fund a refurbishment or provide a cushion. The building is at risk if repayments stop, valuation and legal costs apply, and completion takes weeks rather than days.
Cash flow finance for seasonal troughs
Cash flow finance covers the predictable gap between seasons. A revolving facility drawn in quiet months and repaid in busy ones fits the hospitality rhythm better than a fixed-instalment loan, provided it is repaid in season rather than rolled over until it becomes permanent debt.
Consolidating facilities taken in a difficult period
Many hospitality businesses carry borrowing built up during a hard stretch: a government-backed loan, a top-up from an online lender, a merchant cash advance, an extended overdraft and a supplier plan. Consolidating business debt into one facility may lower the combined monthly outgoing and replace daily or weekly collections with one payment. Well-priced facilities, including scheme loans at low fixed rates, are often best left out of the consolidation.
Borrowing against a peak that may not repeat
The most common error in hospitality finance is sizing a loan on the best recent season. A hot summer, a one-off festival or a year when a competitor was closed can produce figures that will not recur. A provider that looks only at the last six months of card takings may lend on that basis, and the repayments then fall due in a winter that looks nothing like the summer they were based on. Base affordability on an ordinary year, and ideally a poor one.
Risks specific to hospitality borrowing
- Personal guarantees for owner-operators. Most hospitality businesses are owner-run, and most unsecured borrowing needs the owner's guarantee. Where the owner also lives above the premises or has guaranteed the lease, personal exposure is far larger than it appears. See our personal guarantees page.
- Secured borrowing on a home. Securing business debt on a house puts the house at risk. Independent legal advice is strongly recommended first.
- Deposits as working capital. Spending forward deposits creates an unrecorded liability that surfaces when an event is cancelled or a season is cut short.
- Energy contracts. A fixed-term energy contract is a commitment as real as a loan, with exit costs that belong on any list of liabilities.
- Trading while insolvent. A business that cannot meet its debts as they fall due should not borrow more to delay the problem. Directors have duties to creditors, and a licensed insolvency practitioner may need to be involved. Business Debtline offers free, impartial help.
Questions to ask before borrowing
- Can the repayment be met from my quietest quarter, after VAT, wages, rent and energy?
- Have I separated customer deposits from operating cash when working out what the business has?
- Is the facility secured on the premises, on my home or on a personal guarantee, and what does each mean if trading fails?
- If I am tied, does the lease or the pub company's consent affect what I can borrow or secure?
See our guide to the risks of consolidating business debt and the debt comparison tool for comparing facilities on total cost.
Frequently asked questions
Can a tied-pub tenant borrow against the pub?
Usually not against the building, because the tenant does not own it. Borrowing is typically unsecured or secured on the tenant's other assets, and the lease may require the pub company's consent to certain charges.
Can a hotel refinance a refurbishment loan?
Often, particularly once the refurbished rooms can be shown to earn more. A freehold hotel may be able to move the debt onto a secured facility at a lower cost. Include early repayment charges and the cost of a longer term in the comparison.
Does seasonal trading make borrowing harder?
It makes affordability harder to demonstrate. Providers will want a full year of bank statements, not just the summer. Some offer seasonal repayment profiles with lower payments in quiet months.
Should I use next season's deposits to pay this month's loan?
Treat deposits as money held for customers rather than income. If spending them is the only way the loan can be paid, the repayment is probably not affordable and the structure of the debt should be reviewed.