Prior to the emergence of alternative business financing, you couldn’t blame a hotel for not pursuing small business loans. The terms and approval process of traditional bank loans are not exactly convenient for the financial cycle of the hospitality industry. Most hotels experience extreme seasonality, and therefore cannot afford to make fixed, monthly payments during slow periods. It’s at this time, however, when hotels must invest in preparing for a strong busy season, despite their increasing vacancies.
And since scheduling is so vital for staying on top of cash flow, hotels must receive funding and make significant payments on fairly specific dates. They can’t wait several weeks or months for funding, not to mention add even more paperwork to their daily tasks. Companies like United Capital Source solved this industry-wide dilemma by perfecting a type of working capital loan known as credit card factoring, or merchant cash advance.
We Get It: You’re Already Busy Enough
You cannot discuss credit card factoring without bringing up the first arguably most important benefit: simplicity. Hoteliers have enough paperwork to deal with, and their hectic days make it difficult to remember to make monthly payments. With credit card factoring, you don’t have to worry about either of these massive annoyances. Very little paperwork is required for approval, and it’s virtually impossible to actually miss a payment. This is because payments for credit card factoring are deducted from daily credit and or debit card sales. Whenever you batch out your sales, a previously agreed-upon percentage (Capture Rate) is deducted automatically.
All You Need Are Strong Credit Card Sales
The amount you receive is based on the revenue you are projected to generate from debit and credit card sales over a given period. For some industries, this might not sound so safe. How are they supposed to know how many sales they will make a few months from now? Hotels, however, generally have a clear picture of the amount of debit and credit transactions they will perform in the near future.
The industry revolves around reservations, which let the hotel know exactly when a guest will pay for the visit and how much revenue the visit will generate. Hotels know how far in advance guests typically book reservations. And the majority of hotel guests pay with debit and credit cards. Strong debit and credit card transactions is the number one requirement for credit card factoring, as opposed to strong cash flow. A hotel with tumultuous cash flow can access credit card factoring as long as it can guarantee a high and/or consistent volume of debit and credit card transactions.
Marketing 365 Days A Year
The repayment system of credit card factoring lets you use a lot of cash during slow periods without having to pay it back anytime soon. Hotels can not only make long-term investments but also pay their business partners on more cost-effective plans. One example of a crucial long-term investment for hotels is marketing, particularly of the digital variety. Research has shown that it makes more sense for hotels to market to previous clientele. Hotels know when these customers are most likely to make reservations and therefore must market to them well beforehand.
Credit card factoring also gives you the upper hand when it comes to negotiating with vendors and corporate accounts. You have a better idea of how much cash you’ll have on hand in the coming months and can afford to stretch out vendor payments, possibly as long as 60 days. Now that you’re not desperate for cash, you can set your own terms for corporate accounts. Instead of just working with anyone, you can insist on partial upfront payments and only extend a certain amount of credit.
What Season Is It Again?
Another reason small business loans in general will likely become more common for hotels is increasingly unpredictable weather. The success of many hotels is directly related to seasonal appeal, and it’s safe to say the weather for nearly every season has been just a tad out of the ordinary as of late. December feels more like September, May feels more like October, and so on. Hotels in snowy locations don’t know what to expect: a ton of snow or hardly any.
In other words, the parameters of the busy and slow seasons are no longer clear. Credit card factoring is a perfect solution to extended slow seasons or busy seasons. Your payments don’t get any bigger if it takes you a little longer than expected to pay off your total amount. The longer your slow period lasts, the more time and money you have to ensure a strong busy season.
Give Your Cash Flow A Makeover
There is always something else a hotel can do to improve cash flow. A great way to start this long, uphill process is preparing to take out a small business loan. You’ll sharpen your forecasting abilities by monitoring room rates and/or find out which expenses you can cut without sacrificing customer service. Better cash flow gives you access to more powerful small business loans. And when you pay off a merchant cash advance in full, you will likely become eligible for a second round of funding. Instead of just navigating your way through the slow season, this could be your chance to give your hotel a complete makeover from top to bottom.