How to Secure Asset Finance for Soft Play Centres
When setting up your new Soft Play Centre, you are likely to require some form of funding in addition to your own personal investment into your venture. There are several ways to secure such funding and you will need to research each possibility to understand which is right for you and your business.
This document provides an overview of the principles behind Asset Financing, (only one of the funding methods available to soft play centres), so that you can be better informed to decide if this particular type of funding can be useful for you in your new venture.
It has been written by Alex Read, owner of Portman Asset Finance, a specialist finance provider in the soft play market.
Soft Play Finance
The current credit crunch has severely impacted all new start businesses looking for finance. Businesses considered to operate in a niche market such as soft play centres are finding it particularly difficult to source funding. Everyone is acutely aware that traditional high street funding is less and less readily available and thus more difficult to obtain cost effectively for new start businesses.
In this climate it can often be useful to speak to more specialised finance providers who have a thorough understanding of how soft play centres operate and are ideally positioned to help fund these new businesses.
However, asset finance is not suitable for every soft play centre it is important to understand some of the key principles behind it before you decide whether it is the right route for you.
Over Borrowing
One overriding principle is the importance of not over-borrowing to start your business. You must ensure you are not borrowing more than your business can afford. Many new soft play operators get caught up in the excitement of opening their new play centre and lose track of the figures. If you make a significant personal investment into your business and limit your business borrowings you’ll give your business the best possible chance of success.
Type of Finance Available
Soft play equipment finance is most typically arranged in the form of fixed or minimum period lease agreements. Lease payments are fixed i.e. they don’t go up or down and are easy to budget i.e. you know exactly how much is coming out of your account every month. In addition, a percentage of lease payments can be offset against corporation tax to reduce the amount of tax payable by your company.
There are other ways of financing equipment for your soft play business. Finance can be arranged in the form of a Hire Purchase (HP) agreement or a more traditional bank loan. The key difference between leasing and bank loan finance is the security required. A high street bank providing a loan will often require additional security in the form of a charge over a property whilst the equipment is usually the sole security in a lease agreement.
Some lease finance providers are now taking additional security i.e. first or second charges over property in addition to securing their finance against the soft play equipment. This is a direct result of the current economic climate and finance providers are now looking to secure their lending as tightly as possible.
Period of Agreement
Finance can typically be arranged over any period between 2 – 5 years although it is possible to arrange finance over 7 years if required.
It is sensible to take finance over a period that is affordable. Here it is vital that you produce accurate cash flow forecasts that incorporate your finance payments. If your business is under financial pressure from day one, it will be difficult to recover in the longer term. It is often worth reducing your predicted revenues in your business plan by approximately 25% to double check you can afford the repayments and cover every eventuality.
The general consensus is that the length of your finance agreement should mirror the useful life of your equipment. If you think your soft play equipment will last you 5 years, then you should look to finance it over a 5 year period. You do not want to be paying finance payments for equipment you have subsequently replaced!
You must also consider that longer finance periods mean more interest to repay. It is a good idea to choose a period that your business can afford without spreading repayments over too long a term.
Criteria
Tenants i.e. non-home owners will not be able to secure funding unless they can arrange a suitable home-owning guarantor. The best option here is to speak to your finance provider who will advise you of the implications.
Most finance companies credit criteria are based on common sense; no one lends to people with current or recent mortgage arrears even if they have been brought up to date. Providers are also very cautious about unsatisfied Count Court Judgements (CCJS) and Directors who have declared themselves bankrupt in the past.
Generally you should either have experience in the leisure industry or at the very least, fully researched your new soft play centre business. A comprehensive business plan is a good indicator of someone’s personal investment of time into their business.
It is important to be as honest as possible with your finance company as they all carry out rigorous finance checks on the Director(s) of new start businesses. If you have had credit problems in the past, it’s best to explain in detail the circumstances.
You must also have of invested personal money into the business. If you have invested none of your own money, a lender is unlikely to lend you any money. You must commit personally to the business.
Documentation required
Although more difficult in the current economic climate, specialist finance providers are still able to assist new start soft play centre owners. In order to gain a finance approval they will commonly ask for the following information: business plan, financial projections, personal net worth statements for the Directors and personal bank statements for the Directors.
The Directors personal bank statements must not include any unpaid items, as this is a poor indicator of a person’s attitude to finance. You must demonstrate you can manage your personal finances before anyone will lend you money for a business. A business plan must include all the common components i.e. SWOT analysis, Directors CVs, personal investment, analysis of chosen location for the soft play centre etc. Financial projections must cover a period of at least 3 years and be realistic. Lenders providing finance for soft play centres know exactly what is a realistic admission fee and this should be reflected in your planning.
Asset Finance is one of a number of options to consider when trying to obtain funding to start an Indoor Soft Play Centre. The above information should be used as a guideline for general use and for specific information you can contact Portman Asset Finance on 0844 800 88 25.
