The hotel industry is one that is quite different from all other industries. One major reason for this statement is that this is practically only in the hotel sector that one finds that fixed assets such as fixtures, furniture, and all other equipment are tied to the activities of the business. Hotels and indeed hospitality firms, in general, rely heavily on credit facilities most of the time in order support regular investments in fixed assets. Such fixed assets could include land, buildings as well as properties.
Why are Hotel Businesses Often in Need of Loans?
Because of the capital-intensive nature of the hotel industry, it is no surprise that every now and then the issue of hotel financing comes up. And in most of the cases, what the hotels are always looking out for is long-term finance. But, apart from the fact that hotels typically invest much in fixed assets, it has also been found that they also incur huge operational costs.
Some of the sources these costs could be taxes on property, technical and engineering costs, management fees, and general maintenance costs, all of which cannot be eliminated at any given point in time during which the hotel is in operations. Hotel financing, therefore, becomes something a hotel business has to have ready access to if it is not going to be flushed out of operations especially by competition.
There are also other problems that affect hotel business in the country. For example, given the substantial operating leverage that hotels are believed to hold, they usually face the highest exposure and have more volatile cash flows. The implication of this is that when there is an economic crisis such as the recent economic recession of 2008 in the United States, it is hotels that perform most poorly.
This is exactly what is to be expected since the revenue of a hotel is intrinsically linked with the macroeconomy. For everyone in the hotel industry is well aware that when the economy is good, people have much more money to spend on leisure which is mostly what hotels provide.
Conversely, when the economy shrinks, sales decline to make overall profit to slide down. In situations like this, hotels are usually in dire need of hotel financing. But hotels do not exactly find it easy obtaining finance. The inability of hotels to secure funding has led to a rapid decline in the profitability of the hotel business sector, especially since the post-recession period. A decline in the profitability of the hotel sector has had serious implications for lenders, especially the traditional lending institutions, as well as the owners of the business who are seeking the hotel financing in the first place. Lenders have become generally more skeptical about issuing loans or other forms of credit to hotels as a reduction the decline in the financial liquidity that usually enables a hotel to pay its debts.
Banks as a major source of Financing for Hotels and why hotels might be looking elsewhere
One of the major sources of hotel financing used to be the commercial banks but in recent times there has been a general yet dubious reluctance for banks to issue loans to hotels and small businesses in general. This has been the case since the period of the recession, and even though the country has gradually slipped out of the recession, mainstream lenders such as commercial banks remain very conservative about lending money to hotels.
One of the main reasons why hotels-especially the small ones—fail to secure loans from traditional lending institutions is because in most cases they are unable to meet with up with the requirements for hotel financing. One major obstacle that stands in the way of hotel lending is that inability of the hotels to provide the collateral that might be required by the banks.
When this is the case, the hotel is automatically deemed unqualified for a bank loan.
In some situations when a bank judges that a particular lending is actually risky, it could demand personal guarantees from the owners of the hotel. The personal guarantees assure the lenders that the business owners have absolute faith in their business. The bank usually evaluates the net worth of business owners with a view to determining if their total personal assets equal the amount of the hotel financing. Personal items which the owners of the business could give up include homes, cars, land, and so on.
Banks also require businesses to have a solid business plan which should show what the loan is supposed to be used for—maybe equipment, furniture, renovation—and how the loan fits into the overall plan of the business. Of course, not all hotels are able to come up with this kind of detailed plan, and as such it makes unsuitable for bank loans.
Furthermore, a hotel is expected to have a really good credit score before it can approach commercial banks for hotel financing. There are quite a number of reasons why the small hotels might not often fulfill this criterion. Whatever the case might be, a hotel with a poor credit score is almost certainly going to be denied access to commercial bank loans. After all, it is the credit score of the business that enables the lender to determine its creditworthiness, being that the credit score shows how the borrower behaved in past instances. It tells if the borrower is capable of meeting up with monthly payment schedules. So it is important for hotels to improve their credit scores before seeking hotel financing from traditional financial institutions. However, even if a business was to meet all the requirements for a commercial bank loan, there is still no guarantee that it would receive the loan.
In fact, one study showed that the approval rate of commercial bank loans was much less than 50 percent, meaning that more than half of loan application to banks end up in rejection. Small businesses, in general, have begun to realize this and are now shifting their focus to nontraditional sources of business funding. In the case of hotel financing, merchant cash advance has become one of the most popular choices. It is this particular source of small business funding that we intend to examine more closely, with a view to making it apparent how merchant cash advance could be the solution to the issue of funds for hotel businesses in particular.
Merchant Cash Advance as a Ready Alternative to Bank Loans
Merchant cash advance is one alternative source of funding which is very much suited for the hotel industry. This is because merchant cash advances are structured to favor small businesses which process a huge portion of their sales through credit and debit cards. Hotel financing is also possible through merchant cash advance since hotels are most likely to meet the revenue requirement of merchant cash advance providers.
What merchant cash advance providers require in most of the cases is for the business to have minimum monthly revenue of about $5000. There are even new merchant vendors who could accept as their minimum something much less than that. Hotels by their very nature also have a physical location which is one of the core requirements of merchant vendors. Yes, merchant cash advance is not available to online business except under certain circumstances.
What is cash advance and how does it work?
But, the question of what really a cash advance is remains to be answered. A merchant cash advance for all practical purposes is a commercial transaction in which a business agrees to sell a portion of its future receivables in order to have a lump sum of cash. Being that a merchant cash advance is not technically a loan, it does not attract interest payments. But that is not to suggest that merchant cash vendors do not make profits. This is because the process of factoring generates profit for the lenders. If for instance hotel financing of a certain amount is required, the amount is multiplied by a factor that is typically less than 1.5 in order to arrive at the total amount that is payable by the hotel.
After this, both parties agree on the amount of the daily credit sales of the hotel which is going to be committed to paying the advance. This could be in the form a fixed percentage of a fixed amount. Whichever is the case the payments are continually made on a daily basis until the debt is repaid.
In conclusion, there are a number of benefits that come with obtaining hotel financing from merchant cash advance vendors. One such benefit is speed. The funds that come from MCAs are usually made available within a week or so. Meanwhile, there is no collateral requirement neither is it a must for the hotel to have a good credit score. In addition, a business can almost be certain that it will get the funds once it meets the minimum requirements since merchant cash advance has an approval rate of around 90 percent. In short, if a small business is in dire need if cash it can be certain that approaching merchant cash vendors will offer the required solution.