Refinancing a pub

Why refinance a pub

There are three common reasons to refinance a pub, and they often overlap. The first is to lower the rate, where your current facility is dearer than the market now offers or you are coming off a fixed period. The second is to release equity, where the pub is worth more than when you bought it, because you have grown the trade, completed a refurbishment or simply benefited from a rising market, and you want to draw some of that increased value out as cash. The third is to exit a short-term facility, moving a bridging or development loan onto a long-term term commercial mortgage once the pub is trading steadily.

This guide is about refinancing a pub as a trading business. A small pub with living accommodation that is the borrower's only home can be a regulated case, which we refer to an authorised firm. For trading-business refinances we arrange the commercial facility and act for the borrower.

A refinance is sized exactly like a purchase, on the current going-concern value and the current fair maintainable operating profit, not on what you paid or owe. That is the key point: refinancing rewards a pub that has improved since acquisition, because both the value cap and the affordability cap rise with stronger trade, and it constrains a pub that has gone backwards. Before approaching the market it is worth getting a realistic view of the current value and a clean set of management accounts, because that is what the new lender will lend against.

Releasing equity from improved trade

Equity release on a pub works through the going-concern valuation. Suppose you bought a freehouse for 600,000 pounds with a 400,000 pound loan, then grew the trade and the maintainable profit so the pub is now valued at 850,000 pounds. At 65% loan to value the new lender could advance up to about 552,000 pounds, subject to affordability, which repays the existing 400,000 pound loan and releases roughly 150,000 pounds of capital, less costs. The figures are illustrative, not an offer, but they show how growth in trade and value translates into releasable equity.

Released equity is commonly used to fund a refurbishment, buy a second site, pay down more expensive borrowing or simply provide working capital. Whatever the purpose, the same discipline applies: the new loan must be comfortably serviceable from the pub's trade, because gearing up against a temporary peak in value or a single strong year leaves the business exposed if trade softens. We model the post-refinance cover so the structure is sustainable, not just achievable on the day.

Exiting a bridge or development loan

Short-term finance is meant to be short. A bridge used to buy a closed pub at auction, or a development facility used to refurbish or convert one, is expensive to carry and is designed to be repaid by refinancing onto a term mortgage once the pub is open and trading. The exit is the whole point, and a sensible borrower plans it from the day the bridge is drawn. A pub that has just reopened has little trading history, so timing the refinance to a point where it can be valued on a fuller going-concern basis usually unlocks a larger and cheaper term loan.

We map this bridge-to-term path before the short-term facility is even arranged, so the exit is not left to chance. That means agreeing the trading evidence the term lender will want, allowing enough stabilisation for the pub to show maintainable profit, and lining up the term facility in good time so the bridge is repaid before its rate and any exit fees bite. Leaving a refinance to the last weeks of a bridge is how borrowers end up paying for an extension or accepting weaker terms.

What a lender looks for on a refinance

• Current going-concern value supported by a specialist valuation
• Fair maintainable operating profit that covers the new loan with headroom
• A clean three-year trading record and up-to-date management accounts
• A clear purpose for any equity being released
• Tenure and any tie, since a freehold free house supports the most
• A credible reason for the refinance and, where exiting a bridge, a proven trade

The stronger and cleaner the trading evidence, the better the refinance terms, because both the value and the affordability improve. We package the case to the lenders most active on the pub's profile, which often moves both the rate and the amount in the borrower's favour compared with simply asking the existing bank.

The costs of refinancing

A refinance carries its own costs, which must be weighed against the saving or the capital released. Expect an arrangement fee of around 1 to 2% of the new loan, a specialist valuation, legal fees for both sides, and possibly an early-repayment charge or exit fee on the facility you are leaving. Where the aim is simply a lower rate, the saving over the remaining term must comfortably exceed these costs for the refinance to be worthwhile, which is a calculation we run before recommending a move.