Securing growth capital for your serviced apartment: what banks are looking for

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I’ve met a lot of serviced apartment operators in the last few years and a topic that comes up constantly is debt finance and how to secure it. For any fast-growing serviced apartment business, the need for capital is constant so they therefore need to work with providers that can keep up with their pace. Unfortunately, this excludes most banks who are notoriously slow and often resort to opaque credit processes where the prospective borrower is left in the dark for months at a time. The uncertainty caused by Brexit has only made this worse, with big banks slowing down their credit decision processes even further.

In this article, I explore some of the ways in which serviced apartment operators can hopefully speed up this process and increase their chances of securing a loan from a bank.

• 1. A little due diligence goes a long way
One of the USPs that we’re most proud of is our ability to process complex multi-million pound loans in a fraction of the time it takes larger lenders, but with same level of rigorous and robust underwriting that you’d find at a private equity firm. Having run the numbers just last week, we found that the average time taken for us to complete a transaction – from first meeting to disbursement of cash – is three weeks. However, we can process transactions even faster if the borrower and their advisers prepare a robust due diligence pack, such as planning consent, development appraisals, valuations, the business plan, forecasts, etc.

• 2. Know your market
Large Asian operators such as Ascott have done so well in this space because they know their market. Millennials will represent half of all global business travellers by 2020 so they are preparing for this now, launching new concepts, products and services to appeal to this audience. Their new lifestyle brand, lyf, is specifically aimed at millennials, offering city and food guides, bar keepers and “problem solvers”. They hope to open 10,000 lyf units by 2020 in key gateway cities – Australia, France, Germany, Indonesia, Japan, Malaysia, Singapore, Thailand, China (where the pilot property will open in 2018) and the UK.

The challenge for many operators in this space is that serviced apartments are a great fit for most demographics so it can be hard to decide which one to target. Young families often need multiple rooms so getting a serviced apartment rather than multiple hotel rooms will not only be cheaper but is also likely to a be a lot less hassle. For elderly people, it offers more privacy and the chance to make themselves feel more “at home” as they can do things like cook their own meals rather than having to find places to eat outside. For millennials, it’s much more cost-effective – an opportunity for serviced apartment providers better suited for larger groups, who can share rooms to keep costs as low as possible. For businesses, being able to host employees in a shared communal environment, rather than having to book multiple rooms, is also cost-effective. Lenders will want to see that you’ve done your research and come up with a clear and coherent rationale as to why you’re targeting the clients you are, and how you plan on attracting new ones.

• 3. Have skin in the game
When seeking growth capital, a big tick for us is seeing that the borrower has skin in the game and has invested some of their own money in the project. OakNorth was founded by entrepreneurs, Rishi Khosla and Joel Perlman, who invested their own money, and almost half of our workforce are shareholders in the company, having purchased equity in it. We want to see this same commitment from our borrowers.

• 4. Take time to build an excellent team
Since our launch, we have been focused on one thing; solving the problem of scaling non-standard lending in the UK, backing quality management teams in the process. It’s much easier for us to underwrite the potential performance of a branded serviced apartment provider rather than an independent one, which is why when looking at deals with independents, we need to be reassured that the management team know what they’re doing.

• 5. Cash(flow) is king
Every loan we write at OakNorth is driven by the customer’s ability to repay it, which starts and finishes with a healthy cashflow forecast. Typically, our borrowers generate between £5 million to £100 million in annual revenue and must be profitable businesses.

• 6. Develop a debt-specific business plan
When seeking growth capital, the lines between debt and equity can become very blurred. Most transactions are made up of a combination of both but it’s important that business plans are tailored to each. Equity providers are going to be a lot more concerned with the overall growth strategy and where the company expects to be in 10 years’ time when investors will be seeking a return. Debt providers however, will want to see a business plan that’s a lot more asset-aware and cash-flow focused.

• 7. The other metrics
While cash flow, quality management, the location, and a strong business plan are all key, there are other factors that banks will take into consideration too. What are average occupancy rates? How is the company innovating? Has the business succeeded in attracting customers from an array of clients – business men and women, families, millennial groups, etc. – rather than just one demographic?

• 8. Show how hungry you are
Since our launch in September 2015, we have grown to 140 people, built a loan book of more than £700 million with a qualified pipeline of a further £700 million, turned profitable, and attracted almost 15,000 retail deposit customers. We have no intention of slowing down and we want to work with businesses that are as ambitious and hungry as we are. Our clients are typically growing by 25 per cent or more year-on-year and have a clear growth strategy. As a debt finance provider, a good lending opportunity is sweetened further if there’s a chance that we might be able to work with the borrower on another deal soon.

• 9. Look beyond equity
Many serviced apartment operators who are propelled into a sudden growth trajectory think mostly about raising risk-sharing equity investment from venture capitalists, private equity houses, or angels. These are business owners who have a proven business model that’s making money, but who feel forced to dilute and choose equity finance because traditional bank finance isn’t fast enough, flexible enough, or collaborative enough. If you are an established, profitable serviced apartment business, there is no reason why you shouldn’t be able to secure debt, so don’t sell yourself short – consider all your options and take the time to find the right financing structure for your needs.

• 10. Take a ‘whole of market’ view
According to the Competition & Market Authority’s Retail Banking Investigation last year, 90 per cent of SMEs in the UK bank with either Barclays, RBS, Santander, Lloyds or HSBC, and 90 per cent of those businesses only go to their current account provider when seeking a loan. If they get a ‘no’, they don’t go anywhere else. This is a huge mistake. The savviest of businesses develop relationships with multiple financial institutions, using multiple providers to ensure they get the best of every product. At OakNorth, we’re not trying to be all things to all people, we just want to do one thing really really well – loans. Everything we do is focused on how we can improve this proposition for the customer, ensuring that speed, transparency, flexibility and entrepreneurialism are present on every deal.

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