Funding for a hotel industry in crisis
When cash conservation remains priority
At Rangewell, we recently helped a hotelier refinance his current £1.4m loan and extract a further £400,00 for renovations and property improvements.
The world-wide disruption caused by the COVID-19 pandemic has created a very real crisis for the hotel industry.
Although there was a glimmer of hope as the first lockdown was gradually eased in the second half of last year, the return of the disease with increased infection rates has meant that there are simply no guests to welcome.
A very small number of business travellers may still need rooms, but with no tourists - and no end to the crisis in sight - the future for the hotel industry is looking challenging.
According to the latest government regulations to combat the spread of Covid, almost all hotels, hostels, guest houses and campsites must stay closed at least until the current lockdown emergency is over.
Of course, there is hope for the future. The vaccines now being administered could spell the end of the coronavirus - but their effect will not be felt for months - and it is already looking as though 2021 will see little in the way of tourist business, even if the recovery has begun.
It is clear that the hotel industry is now in crisis and that it will be some time before it returns to business as usual - and during that time, the financial challenges will be growing.
What are the challenges?
Hotel owners and their financial backers have had to look hard at the impact on the industry, their businesses and their funding arrangements. At Rangewell, as experts in business funding and with a specialist teaming working to find financial solutions for the hospitality industry, we look at exactly what the challenge may be - and what solution can be available.
“The simple fact is that we have no guests coming in - and that means we have no income coming in either. Usually, January and February tend to be slow, but we should be looking back on a lucrative Christmas period, with everything from works parties and family get-togethers to people just wanting to get away for a break. This year, we had none of that to look back on, and bookings for the next month are non-existent.”
Hotel owners need to come up with new strategies including reaching out to lenders, extending the term of any existing loans and requesting interest payment holidays to ease cashflow concerns.
At Rangewell we know that many hotel owners have done what they can to weather the Covid storm. Putting staff on furlough is one way of cutting costs - but dealing with existing finance commitments is a major cost, and together with utility bills and vital maintenance mean that there is still a steady drain on any reserves that they may have.
What can you do?
- Have an extended cash flow forecast for the next six months. Include downside scenarios to understand critical cash points and any breaches of lending covenants.
- Manage your payments to suppliers.
- Minimise all discretionary operational and capital expenditure. Postpone maintenance and other capital expenditure where possible.
- Put in place an advanced revenue management system and pricing models to respond to market developments quickly.
- Assess the equity or debt funding sources available.
- Be transparent towards existing lenders and involve them in the mitigating procedures and continuity plans.
- Apply for the tax refunds and other financial relief measures.
The biggest problem may be providing working capital. Even where hotels are closed, there will still be substantial costs to cover ensure that security and health and safety standards are maintained. For hotel owners, one of the key questions will be how to fund the key working capital requirements of the business at a time when income has completely dried up.
The Coronavirus Business Interruption Loan Scheme (CBILS) may be able to provide some support. It is a government-sponsored scheme which can deliver loans of up to £5million from high street banks which will be interest-free for the first year, and have recently been extended to repayment terms of up to 10 years with nothing to repay for the first 12 months. The UK Government will provide the lenders with a guarantee of 80% of the amount of each CBIL loan. For businesses with a higher turnover the Coronavirus Large Business Interruption Loan Scheme can allow borrowing of up to £25m.
The government is committed to supporting businesses through the lockdown, and these loans should be a powerful tool to help businesses survive.
However, these are commercial loans and lenders are required to carry out full underwriting process on loan applications and ensure that hotel owners satisfy the requirements of the scheme.
In practice, many hotel owners have found the CBILS scheme difficult to access.
Initially, at least, those lenders who offer the scheme were inundated with requests for funding and had to process those applications with their entire team working remotely, whilst also having to deal with requests for covenant waivers and hotel closures on their existing loan portfolio.
However, although the government is underwriting CBILS, many lenders will not advance funds under the scheme to the hospitality sector.
Why will lenders not lend?
“Our bank manager wanted to be helpful, but when we saw him, he looked at our figures, and said that his hands were tied, and he was sorry, but he could not help us.”
The problem seems to be that the lenders have become reluctant to lend to many sectors because of the uncertainties of Covid. They base their lending decisions on risks, and with no sure end in sight for the crisis, they see that some sectors have a future that is at best unpredictable - and which could be financially unsustainable.
Some lenders believe that the hospitality industry - and particularly hotels of all sizes - are particularly vulnerable. Some, we have found, have placed blanket bans on lending to the sector, and even with government support via CBILS and the smaller and more agile Bounce Back Loan scheme, they cannot offer the financial support that is so desperately needed.
In fact, there is acceptance in the hotel lending community that hotel owners will breach the financial covenants in loan agreements. Some lenders have already adopted a flexible approach and waived financial covenants and provided repayment holidays for an initial period until hotels re-establish trade.
But new lending may be particularly difficult to secure.
Despite the doom and gloom from some lenders, business sector analysts, Knight Frank, have estimated that the UK hotel will rebound strongly once the economy recovers. It anticipates a V-shaped, stepped recovery with occupancy growth stronger during the initial phase of recovery and rebound in revenue per available room to fully recover once travel restrictions are eased and long-haul inbound visitors return.
It means a growing financial crisis for the hotel industry.
At Rangewell, we are working to find solutions for hotels that have run into problems because of the lockdown. We have a specialist team with expert knowledge of the sector and hotel finance, and we know lenders that may still be prepared to advance funds.
Unlike most business funding services, we can search the entire lending market to find funding for our clients.
Our service is personal. We assign a finance expert to work with everyone who approaches us, who can discuss needs, and often, suggest unexpected ways to offer funding solutions.
Then, we can use some sophisticated software to identify the most appropriate sources of funding for each case. Our Rapid Algorithmic Matching Platform (RAMP) technology can quickly identify a list of lenders which might be willing to provide finance to the borrower, based on our understanding of the scale of the needs and the amounts required.
The size of the loan required, the sector and the credit status of each client all influence which lenders who are most likely to be receptive to an application. By automating the process, we can search the entire lending market in seconds.
Our fintech platform system can also generate a digital fact-find, which means we can sense-check proposals quickly and efficiently.
Once we have our shortlist of appropriate lenders, we can approach our contacts within those banks and other financial providers. Armed with data and documentation updated in real-time, we can support lenders throughout the underwriting and due diligence process.
Because of this, we can accelerate the process of completing and drawing down the loan.
It not only means that we can find lenders prepared to advance funds when others cannot, but it also ensures we can streamline the application process - allowing the funds to be available for drawdown in the shortest possible time.
Rangewell’s APIs into Companies House and the Credit Agencies, as well as its automated fact-find technology, provides clear insight into each client and their requirements.
We are independent and we know the entire lending market. That means we can take a view that will put your interests first - and if you have not been successful because of your bank’s lending policies, we will work to find one that is more sympathetic.