For each issue in 2021, we will be serialising a section of our Luxury BnB E-Book for those looking to set up their own hospitality business.
By Abbey Warne and Dominic Johnson
Welcome to Chapter 2B, which will introduce you to the financial aspect of setting up a BnB. It might seem like a complicated process but hopefully the content in this chapter will make it easier. In this chapter we will take you through the different types of borrowing available when it comes to finance, and how you can get the best support possible.
Types of borrowing available for holiday lets.
This section will introduce you to the types of borrowing available, including information on business loans and the steps to consider when it comes to arranging business finance.
Holiday let Mortgages
A mortgage is one of the most popular means of financing a Bed and Breakfast or Holiday rental start up.
Be wary of the risk of over-borrowing, do not overestimate the amount of business that you will attract during the year. Take into account any out of season periods.
Already have a suitable property?
You may need to re-mortgage it to obtain the cash for conversion or modification work.
If this is the case, you will need to inform your current lender that you intend to run a B&B.
Using Business Loans to finance your holiday rental property.
In the past, businesses would have contacted a high street bank for a business loan.
Whilst this option is still popular, there are now more lenders willing to lend finance.
STEPS TO CONSIDER when financing your holiday rental property
1. RESEARCH
Different lenders have different criteria as to what they consider a feasible finance plan.
2. DETAILED BUSINESS PLAN
A strong business plan is a must; it is the backbone and starting point for any business.
Make sure your projections are realistic, show you know and understand the sector.
Numbers are key to a business plan.
3. STABILITY
Understand and show a lender that you will be able to repay your debt.
Show that your business is viable and that you will be able to meet the lenders requirements.
4. BE HONEST
Be upfront with your current situation and the money needed.
Be realistic; don’t overestimate revenues and understate expenses.
5. READ THE SMALL PRINT
Understand terms of the loan and the repayment plan.
6. CREDIT HISTORY
All lenders will check your credit history.
Your credit history could have an effect on the availability of obtaining finance.
GETTING THE RIGHT SUPPORT
All of the topics mentioned above need to be considered when starting and running a Bed and Breakfast or Holiday Rental business. This section will introduce you to the financial support you can get for your BnB.
SHOULD YOU INVEST IN AN ACCOUNTANT?
You need to spend time on running your business and doing what you do best.
Therefore, you need to invest in an accountant to help with the financial side.
It is up to you how much time and cost you want to spend on this.
A proactive accountant should provide the following support:
- Business Growth – help and advice to help your business grow
- Business Plans
- Ongoing Support – Bookkeeping, Payroll Services, VAT
- Management Information – Regular Management Accounts and meetings
- Raising Finance – Assistance and advice on financing
- Tax advice – Tax planning for business owners, wealth management, Capital Allowance claims.
- Compliance – Statutory accounts and tax returns
MORTGAGES AND FINANCE
Can you get a buy to let mortgage?
It is not possible to get a Buy To Let mortgage because you are renting to more than 1 person. However many lenders do offer holiday let mortgages.
SELF INVESTED PENSION (SIP)
You can do a SIP – Self-Invested Pension. This is where you take money from your pension and invest it in a property.
Borrow against another property.
BUSINESS LOAN
Earning ratio – banks are worried about getting their money back.
WHAT IF YOU GET NO BOOKINGS? CAN YOU PAY THE BILL?
We took out a 15 year business loan for 65% of the property value, an extension to our home mortgage for the balance.
We then used savings to carry out the work.
Business Loan
Lower setup
Similar terms to a standard personal mortgage
Can lend to a partnership – i.e. you can create a Limited Company but you don’t need to.
Creating a Limited Company (Benefits and Drawbacks)
Drawbacks of creating a limited company are that you need to produce audited accounts (costly).
The advantages of creating a limited company (protection) are not valid as all business loans are secured against the owners of the business.
Extra business loan information
Bank will normally need at least a 30% contribution, lower than a standard mortgage.
Advantage: you can make larger paybacks (normal mortgage is 10% per year) there is no limit to paybacks and no penalty clauses.
Bank will look at the serviceability of the loan including the amount of income you’d expect to draw from the business.
Equity release from another property
Possibly the cheapest option
FINANCIAL INFORMATION FROM MATT BRYANT AT ZIGZAG ACCOUNTANTS
FINANCE
A potentially major headache for those owning a B&B is money.
Just getting started can be incredibly tough, but with the correct foresight, planning and preparation, it is possible.
HOW MUCH WILL I NEED TO SPEND?
The cost of starting a Bed and Breakfast will vary depending on if you:
Already own a suitable property
Are aiming at the budget end of the market
Or
The cost can be considerably higher if you have not yet purchased the right property and are looking to offer a high-end experience.
These costs can very easily get out of control.
Whatever your particular starting circumstances are, they should be factored into a business plan.
FINAL TIPS
Don’t just plan for the initial start-up of your B&B.
Plan with the next 5 to 10 years in mind.
KEY WEBSITES YOU MAY FIND USEFUL
gov.uk/vat-registration/how-to-register
gov.uk/log-in-file-self-assessment-tax-return
SUMMARY OF CHAPTER 2B
We hope this chapter has helped introduce you to the financial aspects of running a BnB, including borrowing and support. Admittedly, they’re definitely not the most exciting part, but they are crucial steps that need to be completed in order to run a Bed and Breakfast that you’ll be proud of.
The next Chapter (3A) will introduce you to interior design configuration and renovation, soft furnishings and technology.
