Advice Finance

If your business requires premises, here’s how you and your franchisees can keep on top of rent and cash flow

Cash flow in the first few months of trading in a new business is critical for the tenant to meet their business plan; in the worst case scenario even their ability to  continue trading.

In the last few years reductions in commercial property rents in many parts of the country have offered more choice and better locations for commercial business tenants. However, without understanding the total cost, and particularly the cash flow implications of taking on a lease, new businesses can still find themselves needing more funding in the first few months of trading. Banks have never looked favourably on borrowers requesting additional funding at this early stage, and in the present climate many tenants are being refused.

Franchisors should be able to accurately predict and include sufficient contingency in their revenue and business cash flow models. However property-related expenses will often form a significant part of the cash requirements in the first three to four months of trading. Unless cash flow models are updated as lease negotiations progress, significant short falls can occur.

How much difference can there be?
Often the emphasis in lease negotiation is on annual rent, to the exclusion of many equally important cost elements. For example the difference in cash flow in the first six months of trading between an annual rent of £24k and £20k is only £2k. However, cash flow models for properties with annual rents of £20,000 can have differences in cash requirements (just for property costs) in the first six months of trading of up to £20,000. Similarly for properties with annual rents of £50,000 per annum, cash flow differences of £50,000 are not uncommon. Clearly getting the model wrong can have catastrophic consequences.

Areas that affect cash
LowRent-free periods, deposit payments and monthly rather than quarterly rental payments are the obvious ones but length of lease and professional fees can have a surprising impact on cash flow.

The effect of VAT also needs to be recognised. Knowing if the property is VAT registered is clearly important. Not only because of the effect on rental payments, but any deposit will likely include VAT and the amount of Stamp Duty Land tax payable is calculated on rent payable including VAT. The effect these various terms have on the cash flow should not necessarily be the deciding factor in negotiations, but they should be considered very carefully in conjunction with the other requirements of the business.

How do we achieve this?
Landlords will all have different priorities in a lease negotiation, depending on their own personal circumstances. With falling rents, many are increasingly being driven by funding restrictions. Consequently some may be increasingly amenable to reduced deposits or accepting personal guarantees in exchange for a tenant accepting the ‘reduced’ asking rent. If cash flow rather than the absolute rental figures is a tenant’s major issue the offer should be constructed to reflect this. Remember – it’s often not all about the rent!

Author’s note
Robert Dick is managing director of Cirrus tenant Lease services. For more information click here