In part 1 (2 June 2005) we had defined the acronym SMB to micro, small and medium sized businesses based upon the emerging European standards with relation to number of employees, gross sales or revenue and aggregate assets on the balance sheet.

The purpose of the exercise was to provide hospitality industry perspective specific to where your company fits in terms of ‘economies of scale’ and what banks and financial service companies are offering the industry today. That is, specific products and programs are being developed and offered by the broader financial services sector and they will cater to specific business segment sizes (SMB’s) within specified industries as market research and economic analysis would confirm.

Economies of scale in the context of this discussion means simply large hospitality management corporations or LBE’s (Large Business Enterprises) do business with larger bank counterparts (JP Morgan/Chase, Citicorp, BoA/Fleet etc.) and SMB’s usually work within their local market with regional, community or state banks. In addition, we discussed the traditional strategy of encumbering ‘fixed assets’ with bank loans and the possibility of including ‘other asset’ categories from the balance sheet to enhance the total loan amount because traditional lending utilizes conservative LTV (Loan to Value) ratios. Now, we focus on the ‘current assets’ factoring the ‘cash assets’ or cash flows a company has for purposes of providing additional options for working, expansion and investment capital. The purpose is to better enable various business projects by fully utilizing all options available with assets from the balance sheet for optimal project funding.

There are now dozens of financial strategies and hundreds of business project scenarios for the hospitality industry. Executives, boards, property owners and General Managers now have many options for managing the SMB’s business financial life cycles utilizing “advance factoring” (credit line) against future cash flows (merchant card system) and along side traditional bank lending (fixed asset loans) resources. Five generic scenarios for creatively sequence business project phases or rethinking financial resource strategies utilizing CFF (Cash Flow Factoring) are presented below:

BUSINESS SCENARIO

• An incorporated independent regional chain of 5 hotels and travel lodges needs working capital for MRO (maintenance, repair, overhaul) and HVAC (Heating, Ventilation, Air Conditioning) projects on 3 of its properties and the refinancing of the property portfolio falls short of completing the financial project for all 3 properties.
• OPTIONS: Traditional Lending (Loans) and Credit Financing (Factoring)
  1) Encumber all 5 properties utilizing the fixed asset portfolio for a long-term bank loan / mortgage for 5-15 years.
  2) Secure an additional mortgage against the free equity for each property or all fixed, other, current asset categories / 5-15 years.
  3) Secure a revolving credit line from cash flows with open end terms
  4) Secure credit line using factoring against future current assets for 3 or all 5 properties, off balance sheet / 6-9 months terms.
• SOLUTION
  Without adding medium or long term debt to the balance sheet and maximizing the LTV on fixed assets (land/buildings) it may be wiser to establish a credit line of working capital and leveraging cash out of cash flow transactions on the properties with MRO projects only. At a minimum, if traditional lending falls short, cash flow factoring is off the balance sheet, 6-9 months to repay the factor. Factoring offers 5-8 sequential cycles of funding in 5 years versus 1 loan cycle over 5 year minimum term.

BUSINESS SCENARIO

• A medium sized hospitality corporation needs to implement a broadband Internet and WiFi (Hot Spot) access project for its properties in order to continue attracting year round business customers. Working capital is needed for extensive “last mile” cabling and wireless bridge/router hardware purchase and set up for each building including all public areas and individual rooms. A consensus at the management company board level regarding the TCO (total cost of ownership) for the IT project implementing will not justify a long-term loan that’s available since depreciation issues and ROI (return on investment) are an ongoing issue with respect to earning additional revenues versus offering Internet service free to retain customers.
• OPTIONS: Traditional Lending (Loans) and Credit Financing (Factoring)
  1) Encumber all properties utilizing the equity left in the fixed asset portfolio for a medium-term bank loan of 5-15 yrs.
  2) Secure a mortgage on each property in project sequence for medium-term finance 5-15 years.
  3) Secure a credit line against the cash flow for each property or all fixed, other, current asset categories / open end terms.
  4) Secure credit line using factoring against future current assets, off balance sheet / 6-9 months contract cycles for each project phase at each property involved in the project.
• SOLUTION
  Link the technology implementation project phases to available working capital from factored future cash flow transactions (at less than 9% of gross revenue projections) to pay for the project phases area by area at each property. This enables less than short-term financing (6 month cycles) to test the ROI (benefit/value confirmation) on a property by property basis. Enables Internet availability in certain floors or sections for customers who request access early in the project. Enables timing and decisions cycles as to how quickly to implement or whether continued implementation at all properties is viable contingent upon customer usage metrics.

BUSINESS SCENARIO

• The partnership in a restaurant is “dissolving” after many years and one owner wants “cash out” and the other wants to continue to own their business without taking loans or providing personal loan guarantees, which at this stage would reduce profitability for the remaining owner.
• OPTIONS: Traditional Lending (Loans) and Credit Financing (Factoring)
  1) “Earnout” by using daily cash flows to deposit cash for the partner buy out into an open escrow account until cash is accumulated to meet terms of the sale / open end time span.
  2) Use factoring of future cash flows and apply the working capital to leverage cash out for the transition in 9 month cycles.
• SOLUTION
  The key factor here is “cash out” and typical “seller financing” is not desired by either partner. Since the fixed assets are leased, the total buy out is less than if the buildings and land were owned. 2-5 cycles over 1-2 years of factoring the future cash flow from daily sales transactions provides the “cash out” with positive tax impact for both partners, while avoiding long-term debt, avoiding personal credit issues for loan guarantees and seasonal fixed payment issues with a loan.

BUSINESS SCENARIO

• A bar/nightclub (leased building/property) is expanding seating capacity, dance floor, lighting, sound system and adding a second bar service area with a personally guaranteed bank business loan that falls short of completing the project.
• OPTIONS: Traditional Lending (Loans) and Credit Financing (Factoring)
  1) Secure business loans(s) and equipment leasing from projected (pro-forma) financials based upon current financials / 5-15 years.
  2) Use personal credit to acquire cash needed to complete the project including personal 5 year loans and credit cards / open end.
  3) Use factored future cash flows to augment loans and meet gaps in purchasing equipment, fixtures, materials and supplies for 9 month contract cycles.
• SOLUTION
  The loans can meet much of the major cost of improvements where equipment purchases are adding physical assets to the balance sheet. Additionally, CFF ideally provides an ongoing line of capital for materials, inventory, supplies, equipment and other unpredictable details not accounted for in the original budget. If the projected is sequenced correctly, cash flows will improve as more patrons utilize the new facilities and more factored working capital is available as gross revenue/sales increase.

BUSINESS SCENARIO

• A privately held hospitality management company owns and operates 4 properties (200+ rooms each), provides turn-key asset management and property management for properties not owned and they want to prepare to acquire its next and 5th target property, a 5 star hotel resort/spa/golf, which would become the flagship property. The management company has a commitment from a prime lending bank that is contingent upon meeting bank lending requirements after review of the financials for all properties and a 20% cash down payment. Properly sequencing and positioning the financing cycle for the acquisition is critical.
• OPTIONS: Traditional Lending (Loans) and Credit Financing (Factoring)
  1) Encumber all 4 properties utilizing the fixed asset portfolio to maximize LTV for a long-term bank loan / mortgage and wrap the target property for life of the loan.
  2) Enhance the LTV value using “other assets”, especially for franchise brand named properties owned (minus depreciation) for life of the loan.
  3) Consider loan guarantees, bank guarantees with corporate / guaranteed bond funding, usually 15 years.
  4) Secure credit line using factoring against future current assets for the existing 4 owned properties, off balance sheet / 6-9 months terms.
  5) Pledging additional equity assets possibly held outside the management company corporate portfolio for life of the loan.
  6) Bring in a second “equity partner” with extensive financial resources and form a joint-venture or general partnership for life of the project.
• SOLUTION
  An analysis of gross revenue/sales for all 4 owned properties, including cash, check and bankcard transactions yields a factored credit line available @ 20% of gross revenues for each property. Aggregate 20% of gross revenues in a factoring contract that leverage out $500,000 per property “groupings” to enhance to current assets on the balance sheet by adding the factored out cash prior to application for the loan for optimal positioning. The result is an increase in “other income” on the cash flow statement and an addition of the above amounts to the “current assets” or cash assets on the balance sheet to position for loan approval. This is especially necessary if the management company has less than 20% net on the income statement(s) for their 4 current properties. This level of factored cash can boost the margin in some cases. This is a form of “off balance sheet” financing and does not encumber the balance sheet with short, medium or long-term debt obligations. Several cycles of factored future cash flow, including the new resort addition, can then be utilized for logistical and transitional cost issues as they arise.

Many other creative scenarios utilizing “active factoring” for working capital through IPS are possible. Other scenarios include: business acquisitions, software (licensing) purchase, catastrophic event repairs with pre-established “on demand” working capital account(s), room refurbishment in phases, vehicle purchases, purchase equipment versus leasing, bulk inventory discounts for cash purchases and implementing customer requested “amenities” projects, exterior landscaping/remodeling, settling debt or taxes, “turnarounds” and cash reserves.