Introduction
Whenever one thinks of opening or expanding an existing hospitality business, one has to consider the amount of money required for such an undertaking. At times, the money required for such an undertaking may be too much for the operator to raise by himself (Abodabt 2008, para. 2-4). This compels one to look for other sources of finance to help him go on with his or her objectives. Based on the amount of money and urgency of the undertaking, there are various sources of finance that are available to a hospitality business. A business operator must evaluate all the available sources to select the most cost effective source.
While some of the sources of finance offer their money at higher interest rate and is repayable within a long period of time, others offer their finance at a lower interest rate but are repayable within a short period of time. Hospitality business operator needs to put all these factors in mind when selecting the suitable source of finance for his or her business. On the other hand, some financial sources offer little amount of money while others offer huge amount of money. This paper aims at evaluating some of the available sources of finance for a hospitality business (Agriculture and consumer protection 2008, para. 3).
Available sources of finance for a hospitality business
Based on the amount of money required by the business and nature of the business, there are various sources of finance for a hospitality business. The money required by the business may be founded on a short term or long term basis (Anson 2009, para. 3-6). Long term finance is those required by the business over a long period of time. In most cases they go beyond one year. The need for long term financial sources for a business is different from those of a short term source. They may be required by hospitality business when the business wishes to expand its resources or when it wants to buy new assets. Some of the short term sources of finance for a hospitality business include bank overdraft, leasing, bank loans and credit cards. On the other hand, some of the long term sources of finance available for hospitality business include bank loans, asset sales, retained profit, government agencies, and venture capital as well as shares (Barry 1994, pp. 3-15).
Short term sources of finance
Bank overdraft
This is one of the most flexible sources of finance for tourism businesses. It is an agreement between the business and its bank for the business to withdraw a certain amount of money beyond what it has saved with the bank (Bates 1998, pp. 109-124). This money can be used by a hospitality industry to meet its urgent financial needs such as buying stock or paying staffs. There are various advantages associated with this source of finance.
Some of them include; bank overdraft as a source of finance to hospitality industry is flexible. The business can borrow the amount of money it requires at any time. The method is also fast thus helping the business meet its urgent needs. Unlike bank loans which require the business to produce some property to act as security, this source of finance does not require one to give security. Its terms of repayment are also favorable (Bergemann & Hege 1998, pp. 703-835).
The business operator may decide to repay the amount in installments or pay the money at once. Despite this source being flexible, there are some overheads incurred by a business when using the source. Some of these include; the amount of overdraft offered by the bank can be called in at any time. It does not matter the period one is expected to repay the money in. The bank may decide to call in the entire mount rendered at once.
The limit allowed for one to withdraw may be too little to cater for one’s needs. This source is not suitable for hospitality business incase it needs require huge amount of money. Unlike loans where one can go to any bank and get it, bank overdraft can only be obtained from a bank where one maintains an account. It becomes hard for one to ascertain his or her borrowing cost through this source of finance (Biz/ed 2008, para. 1-3). This is because its interest rate may vary with time.
Leasing
This has been one of the most common methods that are being used by different businesses to fund their operations. It is a situation where a business organization is allowed to use a certain property at a certain cost (Bizxchange in 2010, para. 5). The method is suitable especially when a business requires the property only for a short period. For hospitality business that is starting, one may not be in a position to buy or construct all the required structures. To cater for this, one may decide to lease some of the required properties such as buildings or vehicles and be paying for them as he or she prepares to build or purchase his/hers (Tutor2u 2010, para. 2-6).
Some of the benefits accrued through using this source of finance are that the source offers a fixed rate of financing. Unlike bank overdraft whose financing rate may fluctuate with time, in leasing, a person pays the same amount of money per month (Buch, Doepke & Pierdzioch 2005, pp. 744-765). The source is not affected by inflation. Despite the cost of the property going up, a person pays the initial amount of money. It is also not connected to the performance of the business. For equipments required for a short period, such as construction machineries, it becomes the most favorable source of finance for hospitality business (Capricon Tourism 2009, para. 4).
There are various drawbacks associated with leasing as source of finance for hospitality business. Through this method, one has an obligation of making payments. It is difficult to terminate a lease even if the business is running at loss. This becomes hard for the business as one is required to pay the entire agreed lease amount. One does not have the right to the leased property until he or she purchases the item after the expiry of the lease period. It becomes hard for business operator to lease the property to another person if he or she is not using it in the middle of the lease period. Despite one not assuming full ownership of the leased property the business operator is supposed to incur all costs associated with maintaining the property (Cassar 2003, pp. 261-283).
Long term sources of finance
Venture capital
Venture capital is gaining popularity among the growing business organizations. Venture capitalist are comprised of wealthy individuals or companies that aim at joining developing businesses through funding them (Dubrin 2009, p. 243). The method is suitable for hospitality business as it is one of the methods that provide value added services to the business. Venture capitalists; apart from funding the business also regularly furnish the business with operational, financial and strategic advice. This can help in developing the hospitality business. As most of venture capitalists are experienced business operators, they may help the business in coming up with the most suitable pricing mechanisms for its products and services (Fundamentals of business 2010, para. 2-5). This method of financing also has numerous limitations.
Unlike bank overdraft or bank loans, venture capital as a source of finance for hospitality business results in the business operator losing full control of the business. Having financed the business, venture capitalists may want to assume control of the business. This makes it hard for business operator to make independent decision on matters affecting the business. They may intrude into business affairs altering one’s strategies (Garry, Scholes & Whittington 2008, p. 287).
Government grants
Government grants are another source of finance to a hospitality business. Government may support a business in different ways (Gompers 1995, pp. 461-478). For areas with limited number of businesses, a government may decide to offer incentives as a method of encouraging more people to invest in these areas. The government may also offer technological and advisory support to business operators. Some of the benefits accrued from government grants as source of business finance are that one can be able to acquire huge amount of money at once (Graham & Harvey 2001, pp. 187-243).
The grant may be prestigious thus making the hospitality business known to the public. As a result, a business operator may be able to increase his or her market share through this method of financing. Despite the business getting a lot of money through government grant, it requires one to go through a long process before being granted the money. One has to come up with a viable proposal for the government to finance him or her (Kulkami 2009, para. 4).
Unlike bank overdraft, the method is not suitable in case of urgent need. One is expected to repay the money. In case the hospitality business is cash-strapped, the method may turn out to be a nightmare. There are regulations to be followed when spending the granted finance. It becomes hard for one to freely spend the money. Not all business organizations qualify for this source of finance. For those who qualify, the government imposes terms of using the money such as inclusion of other activities in the business. This leads to the business incurring more cost than it speculated (Maimbo & Ratha 2005, p. 342).
Bank loans
Just as banks are suitable for offering short term finance, they are also suitable for offering long term loans (Modigliani & Millerm 1978, pp. 243-257). One of the benefits of bank loans is that this source is readily available. Every bank is readily willing to offer finance to be able to repay their depositors with interest. Different banks offer competitive interests for their loans. This allows hospitality business operators to have a variety of sources to choose from. Banks offer flexible amount of money making it suitable for hospitality business operators. For persons who qualify for bank loans, their repayment terms are favorable (Oliner & Rudebusch 1995, p. 423).
Banks offer liberal repayment conditions and also nurture a good relationship between the business operator and the bank. Apart from financial support, banks also offer advice to business operators on how to spend their money wisely. This helps them in utilizing their finance wisely. Some of the drawbacks associated with bank loans are the overheads of having to apply (Ongena & Smith 2001, pp. 449-475).
Unlike bank overdrafts, bank loans are not suitable for urgent needs. There are different procedures associated with processing a bank loan. This makes the finance delayed hence not suitable for hospitality businesses that have urgent need for money. Just like government grants, not all business organizations qualify for bank loans. For hospitality business to be granted a bank loan, they have to show a good record of financial management in the past (Pirraglia 2009, para. 2).
Methodology
To arrive at this decision, a survey was conducted on two hundred hospitality businesses where every business operator was expected to respond to some questions. Questionnaires were administered on all the participants. Every participant was asked to cite some of the sources of finance they use in their daily operations as well as the source of finance they used when opening their businesses. They were required to give the benefits and drawbacks associated with all these sources of finance. The data was then analyzed through statistical methods to determine the most preferred sources of finance by hospitality business operators. The period of time taken in repaying each amount of money granted to operators was also analyzed leading to the identified sources being classified as either long term or short term.
Conclusion
Because of the numerous sources of finance available for hospitality business, business operators must evaluate them before embarking on selecting the source to use (Storey 2000, p. 87). Some of the available sources may not be adequate for the business based on the amount of finance required. While others may have the capacity of lending the entire required amount, they may be charging high rate of interest thus making it hard for the business to meet.
For business operators who need to have full ownership of the business, they must avoid using government grants and venture capital as their long term sources of finance. This is because the financiers may influence operations within the business thus denying them full ownership of the business. In case where the business wishes to use a property for a short period of time, leasing would be the most convenient source of financing (Thompson & Frank 2005, pp. 127-142).
Reference List
Abodabt, 2008. Understanding Sources of Business Finance – How to finance Your Business. Web.
Agriculture and consumer protection. 2008. Sources of finance. Web.
Anson, M. 2009. Advantages and disadvantages of retained profits as source of finance. Web.
Barry, C. B. 1994. New Directions in Research on Venture Capital Finance. Financial management, Vol. 23, No. 3, pp. 3-15.
Bates, T. 1998. Financing small business creation: The case of Chinese and Korean immigrant entrepreneurs. Journal of Business venturing, Vol. 12, No. 2, pp. 109-124.
Bergemann, D. & Hege, U. 1998. Venture capital financing, moral hazard, and learning. Journal of Banking and Finance, Vol. 22, No. 6, pp. 703-735.
Biz/ed, 2008. Long Term Sources of Finance. Web.
Bizxchange. 2010. Sources of Finance: The Long-Term Finance may be Raised by the Companies from the following Sources. Web.
Buch, M, Doepke, J. & Pierdzioch, C. 2005. Financial openness and business cycle volatility. Journal of International Money and Finance, Vol. 24, No. 5, pp. 744-765.
Capricon Tourism, 2009. Financing your tourism business. Web.
Cassar, G., 2003. The financing of business start-ups. Journal of Business Venturing, Vol. 19, No. 2, pp. 261-283.
Dubrin, A. J., 2009. Essentials of Management. New York: International Thomson Publishing.
Fundamentals of business, 2010. Sources of short term finance. Web.
Garry, J. Scholes, K. & Whittington, R., 2008. Exploring Corporate Strategy. Singapore: Pearson Education Pte. Ltd.
Gompers, P. A., 1995. Optimal Investment, Monitoring, and the Staging of Venture Capital. The journal of Finance, Vol. 50, No. 5, pp., 461-478.
Graham, R. J. & Harvey, C. 2001. The theory and practice of corporate finance: evidence from the field. Journal of Financial Economics, Vol. 60, No. 2/3, pp. 187-243.
Kulkami, D. 2009. Different Sources of Finance Free Interesting Hint. Web.
Maimbo, S. M. & Ratha, D. 2005. Remittances: development impact and future prospects. Washington, DC: The International Bank for Reconstruction and Development.
Modigliani, F. & Millerm M. H. 1978. The Cost of Capital, Corporation Finance and the Theory of Investment. New York: American Economic Association.
Oliner, S. D. & Rudebusch, G. D. 1995. Sources of the Financing Hierarchy for Business Investment. New York: The MIT Press.
Ongena, S. & Smith, D. C. 2001. The duration of bank relationships. Journal of Financial Economics, Vol. 61, No. 3, pp. 449-475.
Pirraglia, W. 2009. Advantages and disadvantages of bank loans. Web.
Storey, D, J. 2000. Small business: critical perspectives on business and management. Great Britain: TJ International Ltd.
Thompson, J. L. & Frank, M., 2005. Strategic Management: Awareness, Analysis and Change. Leicester: Thomson Learning.
Tutor2u, 2010. Sources of finance for small and growing businesses. Web.