Approaching a bank

When it comes to property the mantra may be ‘Location, location, location’ but for businesses in general it should be ‘Money, money, money’. Enter your friendly but slightly paternalistic neighbourhood bank manager, peering sternly but benevolently at you with experienced eyes over his pince-nez. Well that’s how it used to be. Nowadays you are more likely to be critically assessed by a number-crunching official. He or she might have a charming, smiling manner but it’s probably been learnt at a series of seminars run by progressive-aggressive consultants appointed by the bank to make it more up to date and ‘relevant’.

If you already have a bank with whom you have satisfactorily maintained an account for a few years then this should be your first port of call. You will be introduced to someone in the business section who will have the designation – ‘Banking Relationship Manager’ or something of the sort. If you don’t have a relationship with a bank then your request for a loan will be treated with greater caution. They will almost certainly want to carry out credit checks.

Your financial contribution

If you do not have any available money to invest in your business you will not persuade a bank to invest in it either. It is impossible to state categorically how much the bank will expect you to put in because banks’ policies differ and, depending on your previous relationship, a bank might be persuaded to agree to a smaller than usual deposit.

If you buy your property, as a general indication, a bank will probably be prepared to contribute 70% of valuation, leaving you to find the remaining 30% plus the difference between the valuation figure and the price you actually pay to get the place if greater than valuation. The bank will expect you to provide the deposit from your own resources, not another loan.

So far as the fitting out costs are concerned, as a general guide, banks will probably look to you to contribute 50% from your own resources. The bank will probably want some security for their loan which will be greater than the actual amount borrowed. If, for instance, the cost of fitting out comes to £40,000 it is likely the bank will want security to the extent of around £55,000. This is because in the event of business failure and the security having to be realised (banks always look at the worst case scenario) the amount raised may be less than anticipated. The security is most likely to be your house or some other property but could also take the form of stocks and shares.

If you lease premises and you require funding simply to fit the shop out and/or pay for goodwill and fixtures and fittings the figures are likely to be similar – i.e. the bank will lend 50% of the costs on the basis of security cover along the lines mentioned above.

Dealing with the bank

Over the years I have heard many complaints about banks from friends and colleagues. If it’s a question of persistent mistakes such as paying money into the wrong account or failing to cancel direct debits then I sympathise. Everyone makes the odd mistake but there is no excuse for repeated sloppiness and it should not be tolerated. However, on the general question of agreeing loans, extending overdrafts and so on I have to say that in 25 years I have had few difficulties.

Don’t forget: banks are commercial operations, not funded by the state. They are keen to do business but they are not going to make available loans if there is no realistic prospect of repayments being maintained. This would not be in anybody’s interests – least of all someone dipping their toe into the commercial ocean for the first time.

Equally, if accounts do fall into arrears, whilst they should be sympathetic and constructive in their response, at the end of the day they will take action to recover money due to them.

If you follow certain simple rules in your dealings with banks they should be supportive of your venture in good times and bad – and such support really can be crucial.

1. Talk to the bank sooner rather than later

When starting out don’t wait until you’ve got a particular property in mind and are under pressure to conclude a deal. It’s important to get an idea of how much you can borrow, what the likely repayments will be and what the banks requirements are – business plan, type of survey and so on. This is equally true when, later on, you want to expand the business or acquire some new equipment. Make an appointment and let your manager know about your plans.

2. Use good psychology

Make the person you are dealing with feel important. Share your ideas and make it clear above all that you are looking to them for help and that you respect their opinions. Don’t give the impression that you take them for granted. In a way it’s all a bit false but it’s also part of the game called Being In Business.

3. Let your manager know right away if there are problems

Once you’re up and running it would be surprising if you didn’t experience a bit of turbulence now and then. If you become aware that financial problems are in the offing make an appointment with your manager and explain the position. This will be greatly appreciated and it may well be that your manager will have the necessary experience to be able to make sensible suggestions as to what you can do to deal with the situation. Apart from anything else you need to know to what extent the bank will be prepared to help you out. Even if the problems are serious or indeed terminal, nothing will be gained by burying your head in the sand – least of all the support and co-operation of your banking advisor.

4. Deal promptly with requests for information

Each year your bank will ask to see your most recent set of trading accounts. In addition it will be in touch with you about the renewal of overdraft or other borrowing facilities. If you ignore such requests because you’re ‘too busy making a living’ you will cause extra work and irritation and will make yourself appear unprofessional.

If you follow these simple rules then you are unlikely to encounter serious problems with your bank.

Not only that but you will probably find that obtaining a house mortgage or personal loan will be easy – potentially very helpful since self-employed small business people sometimes find it harder to obtain such loans.

In my experience the people who run into difficulties with banks and complain about them the loudest have failed to follow these rules. I suspect some have an inbuilt prejudice against banks for some indefinable reason. If you have such feelings I suggest you get over them. You need banks. Of course, they need you too, so you shouldn’t let them walk all over you.

Your business plan

In considering your application for a loan your bank will want to see a business plan. I’m sure many people not used to writing essays or reports will dread this particular requirement but really it’s not something which should alarm you. There are many books which give advice on how to prepare a plan and these may well be helpful. Bear in mind that brilliant works of literature are not required and your plan can be quite simple and does not need to follow any particular style though there would be no harm in asking your bank if they happen to have any preferred layout.

The plan should not run to more than four or five pages. It should be neat, typed not handwritten, and easy to follow. The first page should be an ‘elevator statement’ -wonderful expression. It means a statement that is short enough to read in the time it takes to travel up to someone’s office by elevator. You will also see it referred to as an ‘executive statement’. Apart from your personal details it should contain the key elements, in bullet point format, of your business plan.

There are a number of important general points to bear in mind when writing a business plan.

1. The plan is at best a well-informed guesstimate

The banks are aware of this. But, they want evidence that you have realistically appraised the financial nuts and bolts of your new venture and that you can make out a solid case for a business which is going to be able to produce a reasonable turnover. If your figures produce an annual profit of £1000 or £1,000,000 then clearly you will have to go back to the drawing board. The estimated turnover and profit margin has to be realistic.

2. The expenditure side of the plan is the easy bit to estimate

We have all had to make bank loan repayments and pay electricity and telephone bills. When starting work on your business plan just try to make a list of every single thing you will have to spend money on; per week, per month or per year, whichever is easiest. Then convert all figures to annual. It’s not straightforward, of course, because you don’t necessarily know how many refrigerated units you will have nor how much electricity they will use (more than you think, I can tell you!).

Phone your local business electricity office and try to get an idea of likely annual charges from them.

Contact a supplier of meats or sandwich fillings or whatever and ask them about the price of their goods. See if they can give you an idea of what a small or medium sized sandwich bar spends on average.

Contact your local rating office, who should be able to tell you exactly what are the current charges applicable to your property – and don’t forget to ask if there are any increases in the pipeline.

It won’t be exact but it is possible to build up a reasonably accurate picture.

3. The income side is the hard part

Income really is a guesstimate. By this stage you will have carried out some initial research. Go back to a sandwich-coffee bar similar to the kind of operation you have in mind. Sit in your car for an hour or so at a busy time and a quieter time and count the number of people going in and out. Imagine the sort of selection of things they will buy and the average spend per customer, bearing in mind the prices you intend to charge. This will inevitably vary considerably from place to place. A chicken sandwich in central London will cost more than one in Halifax. It’s impossible to generalise. Try to work out a daily take. Remember that for most operations catering to any significant extent for the office trade, takings on Saturdays and Sundays will be 30 or 40% lower than on weekdays.

Assuming you are going to make your own sandwiches (which most places do), work on a gross profit margin (i.e. retail cost to the customer less the cost of bread, filling and packaging) in the region of 60 to 70%. (If you decide to buy pre-prepared sandwiches in from a manufacturer you will probably receive a discount on retail price to the customer of between 30 and 40%).

You want a positive response from your bank so there is no harm in massaging the figures a little bit. Anyway, since it’s a guesstimate you might be right. Be sensible but be positive.

4. Write about your vision for the venture

Demonstrate to the bank that you have thought through the why, the what, the where and the how. Draw a diagram of the shop showing the internal layout. Draw a map of the area surrounding the shop indicating the likely sources of business, offices, colleges, shopkeepers, passers-by and so on. Give details of the competition. Explain what you have that is just that bit different and which will attract customers away from some of the better-established places. Consider including some photographs. Give details of any relevant experience you and/or your partner have. Remember that many areas of work are relevant to running a business such as a sandwich-coffee bar: personnel work, bookkeeping, accountancy and of course any involvement in catering or the hospitality industry generally. If you are a good amateur cook, interested in food, this too is relevant. Put it all together in a file or folder in a professional-looking style.

If you present your business plan to your bank in a clear easy-to-grasp way they are far more likely to be persuaded that you are the kind of well organised professional person to whom they should be lending money.

5. Don’t just look at the upside

If your plan is too gushing about your prospects your bank may form the view that you are not looking at the proposition realistically. Perhaps they will consider you are too over-optimistic to be good in business.

Take one common issue: competition. If there is a lot of competition, state this clearly. Explain what the other places offer, and then explain in what ways you intend to offer something different and distinctive which will persuade some people to switch allegiance to you.

Don’t give the impression that it will all be plain sailing – show the bank how you will address challenges.

6. Don’t dismiss your business plan as just a formality

If you prepare your plan with care it will give you quite a good idea of the financial realities of running your own business. It will also bring home to you the responsibilities you will take on to your many suppliers and creditors, including of course the Inland Revenue and Customs and Excise. Perhaps you will be pleasantly surprised or at least reassured and encouraged to go on. Perhaps you will start to have second thoughts about the whole idea.

Using an insurance broker

It’s a pain having to pay out lots of money in insurance premiums when claims are so infrequent, but if you do have to make a claim you will kick yourself if your cover is inadequate. Remember also that an insurance company will expect you to meet your legal obligations in important areas such as employment law and health and safety (see Chapters Eight and Nine). you should carry out a risk assessment of your premises.

In the case of a sandwich-coffee bar the main risks to business premises come from:

• Fires: electrical faults are the biggest cause – check electrical items and wiring regularly – don’t ignore that threadbare looking wire coming out of the contact grill.
• Water Damage: mainly caused by burst pipes and leaks from water tanks. Inspect regularly, especially when the temperature drops noticeably during the winter months.
• Burglary: give serious consideration to installing a burglar alarm – a very visible deterrent.
• Employee injuries: take precautions to guard against injuries. Ask your employees to tell you if they have any ‘near misses’.

Why use an insurance broker? To save money and hassle.

The cost of insurance can vary dramatically from company to company. In addition, insurance companies sometimes impose increases because they’ve sustained large claims in a particular year. Accordingly it may be in your interests to change companies from time to time. Add to this the fact that you may require a considerable range of insurances – motor, buildings, contents, business interruption, employer’s liability and so on – and you can see that the assistance of an expert in the insurance field might well be a good idea.

A broker will also review all your insurance policies on an annual basis and compare the renewal premiums being quoted by your present company with the rates currently being charged by competitors. In this way you can be assured that the premiums you are paying remain competitive.

You could, of course, do it yourself. But when you’re busy running a sandwich-coffee bar you probably won’t have time to undertake this kind of exercise. Your premiums will probably be paid by direct debit and you may well not register the fact that they have gone up considerably one year – or if you do, you may well put off doing anything about it and then forget all about it until the following year.

Bear in mind also that insurance brokers don’t charge you anything for their service – they get their commission from the insurance company. They will also usually help with the paperwork involved in making claims should the need arise and this can be a real benefit for busy small-business people.

A few words of caution

Some brokers are tied to particular insurance companies and will be keen to sell their policies. It is most important that you choose a broker who is independent and whose only interest is to secure the right policy at the right price. The other worry I sometimes have is that once they’ve set up your policies it’s more convenient for them just to see them renewed each year rather than put too much effort into seriously checking out the possibility of cheaper policies. So as the years go by you should keep an eye on the level of your premiums. Don’t be afraid to challenge your broker if the premiums strike you as being on the high side.

As with other advisors you want someone who is familiar with small businesses – not all of them are. If you don’t have an insurance broker at the present time then, as always, a personal recommendation from someone who is in business would be very valuable.

Insurance brokers are often financial consultants as well and might be able to help with personal investments, pensions and the arrangement of loans for business expansion or indeed house purchase.

Understanding the role of the environmental health officer

A cross between Dracula and the secret police?

This is how some people see environmental health officers (EHOs). It’s really not like that. A great deal of what they have to say amounts to mere common sense. In general they are keen to get on with their job, which is to help you comply with the numerous statutory provisions affecting the food industry insofar as they apply to you. They have no interest in being gratuitously awkward.

There are many matters that fall within an EHO’s area of responsibility. The main ones that affect you (which are dealt with in Chapter Nine) are these:

• cleaning schedules for the shop
• staff training in food hygiene
• temperature controls
• pest control records
• staff personal hygiene
• the decorative condition of the shop
• the general working system in the shop.

You might think that an EHO is someone you will only come across once you’re up and running and this will certainly be true – if you wait for him to contact you. But in my view it is in your interests to take the initiative and make contact before you start trading and, crucially, before you commit yourself to a particular site. It is a good idea to regard the EHO as part of your initial team of advisors.

The point is that although you might think a particular unit is perfect for your needs there may be problems from an environmental health point of view – and you should know about them in advance.

Let’s take a concrete example: is there a mechanical vent in the toilet? It’s a legal requirement, not just for what might appear to be the obvious reason but also to remove chemical fumes associated with cleaning materials and the like. If there is no extractor in your chosen shop unit, is there a nearby flue through which air can be mechanically extracted by means of a pipe or duct? If not you might have to install ducting from the toilet to an exterior wall. What kind of distance is involved? Perhaps the ducting will have to be fitted under the floorboards. How long will it take? How much will it all cost?

You may, of course, find that there are no particular problems. This is all to the good; but you will almost certainly find that your EHO gives you some useful free advice for the future. When you arrange to meet your EHO, have a rough plan of your intended layout with the position of fridges, serve-over units, etc. so that the advice you receive is as well informed as possible.

A word of warning

If you are interested in acquiring a going concern and want to arrange a visit from the EHO prior to the conclusion of a deal you might encounter resistance from the current owners. It may be that they are doing something they shouldn’t be doing. They want to sell their business so the last thing they want is any hassle from the authorities which might involve them in any expense. Don’t let this put you off. Business is business, and it is very much in the interests of your fledgling business to have as much information as possible at this stage of the game. If a seller doesn’t want to let an EHO into the shop you should immediately be suspicious and make it clear that if the seller is not prepared to allow such a visit you might have to reconsider your interest in the property.

It is true that some EHOs can be officious and a bit self-important on occasion. But in my experience most problems are caused by people not complying with the rules and then burying their heads in the sand when the breaches are spotted. The fact is that your local environmental health department has the right to inspect your premises, so you can’t hide anything from them. They will usually find something wrong, however minor, but unless it is serious, you will be allowed a reasonable period of time to rectify matters.

Getting help from a refrigeration advisor

Nowadays it would be unthinkable to open a sandwich bar which did not have good quality refrigeration units. You will probably require at least:

• a substantial open-fronted display (or dairy) unit for your sandwiches and salads. If space allows you will also be able to keep other items such as yoghurts and drinks in this unit.
• one good-sized serve-over or ‘delicatessen unit’ for your sandwich ingredients.
• a good quality industrial storage fridge.
• a commercial quality upright or chest freezer (space considerations will dictate which).

There are quite a lot of furnishings and pieces of equipment which can be acquired fairly late on in the proceedings. Large refrigerated units are definitely not amongst them. The problem is that it can take months from placing the order to having big units delivered. You can’t open without them and it can be incredibly frustrating to find that everything is ready but you are prevented from opening because a crucial piece of the jigsaw is missing.

Refrigeration experts can show you brochures, discuss capacity, delivery times, etc. and generally help you to decide on the right unit for your operation. If you have not dealt with the particular company before you might be asked to pay a deposit when you place your order.

Sudden unexpected closures are bad for business

Apart from delivery issues, a refrigeration expert is also of great importance after you have opened. If your serve-over unit breaks down at ten o’clock on a summer’s morning it might affect your ability to trade if it’s not fixed quickly. It’s as serious as that. Regular customers will be forced to go elsewhere and might like what they find. Passers-by too will try somewhere else and might not try you again.

The point is that if you do experience a problem of this sort you need to have somebody reliable who can respond without delay and get you trading normally again. A refrigeration expert can also give advice on ways in which you can make your larger refrigerated units function most efficiently and also how to maintain them in order to ensure as long a life as possible.

One other point on this subject: if you are unlucky enough to suffer a power cut for a prolonged period of time and you lose refrigerated and frozen supplies as a result, get something in writing from your electricity supplier confirming the details – you will need this for any insurance claim.

Using shop-fitters, decorators, plumbers and electricians

I shall deal later in the book with the issue of whether it is better for you to use a firm of shop-fitters or individual tradespeople to fit out the shop. In the meantime bear in mind that good tradespeople are very often booked weeks if not months in advance. For this reason, part of the process of concluding a deal should be to check that the particular people you have in mind will be available at the appropriate time to allow you to open on your preferred date. Don’t assume that they are waiting around in their offices ready to spring into action when your call comes. It might not be a bad idea have a second choice in mind in the event that your chosen person is unavailable because, for instance, they are held up on another job. Such eventualities are particularly likely in the case of smaller or one-person operations.