All you need to know about funding luxury leisure assets, such as accommodation units and hot tubs, using asset finance
What is asset financing?
Asset financing refers to the use of a company’s balance sheet assets, including short term investments, inventory and accounts receivable, to borrow money or get a loan. The company borrowing the funds must provide the lender with security interest in the assets.
One of the most interesting and rewarding ways of adding value to land is through the leisure industry, and glamping has become a very fast growing and aspirational sector.
Glamping directly and very effectively competes with more traditional UK holiday choices such as camping and caravanning. It is an alluring alternative, but there is a larger initial setup cost. A serious initial investment is likely to be necessary as there has to be a focus on the quality of accommodation units and facilities in order to pull off the glamping ‘experience’ guests are after. Maintenance costs will also be higher.
Glamping covers a range of assets that may be needed such as pods, cabins, bell tents, tipis, yurts and hot tubs, each of which comes at a cost. When the site is up and running there may also be a cash flow issue with much of the revenue derived in the peak season, which doesn’t help with investment income. This is where asset finance (and invoice finance) can help.
Finance and SME markets
Most small to medium sized enterprises (SMEs) do not have the benefit of a diversified range of sources of finance, or at least they are not aware of their options.
Conventional lending and overdrafts from banks dominate financing for SMEs, accounting for roughly 80% of total financing. However, banks are generally reluctant to fund assets in new technology and leisure as their understanding of the assets is limited and they are considered high risk with possible high depreciation.
BMG’s research for BIS (Small and Medium-Sized Enterprise (SME) Journey Towards Raising External Finance) states that: over half of SMEs that sought finance in the past three years went directly to their main bank; those seeking finance for working capital were likely to use bank overdraft and credit card finance; and those looking to buy assets most commonly seek a bank loan. However, bank lending has fallen dramatically (again) since the financial crisis, with most commercial banking sectors in main banks being reduced to one or two commercial bank managers for whole regions of the country. Their ability to visit asset opportunities and to explore the risks has been vastly reduced and new ventures are suffering with any investments going to ‘safer’ enterprises.
This is where the market has seen the growth in asset financing, with the larger brokers having relationships with multiple funders. The advantage a large broker offers to a new venture enterprise is that they will take the time to understand the asset, the opportunity, the product manufacturer, the customer and the forecasts of the asset use and how this relates to the success of the business. This information is captured in a portfolio, which is presented to a broker’s multiple funders in the field.
It is also very likely that the payments generated are more cost effective. The reason for this is that the broker allows funders to better understand the risks to a level they often lack time to explore. Also, with the broker having a competitive tender process, funders recognise that to win the business they need to be well priced so the new venture often receives better rates.
Funding luxury leisure assets
There are many reasons to fund assets, but the main one is the benefit of the capital remaining within a profitable business so it can be reinvested, rather than being front loaded into the ownership of a depreciating asset.
For example, a glamping asset worth £10,000 on purchase is likely to depreciate by about £3,000 to £7,000 over three years. However, on a theoretical regular payment of £400 a month over the three years to own means the vast share of the capital remains in the business and increases by 15% for every pound. So the £10,000 could in theory of increased to about £15,000 of NET value, or depreciated to £7,000 and no additional business growth found.
Glamping is a very interesting and dynamic new sector of the leisure industry, and the sky is the limit. Asset finance is a real option and can be achieved on any of the items you own. If you are a manufacturer, a broker can even help you fund your customer projects, making you an appointed representative. We would love to help you.
About the Author
Richard Frazer is the brand manager for Charterhouse Asset Finance and has over 15 years’ experience in the automotive and asset finance industry. He has previously worked with companies including Hitachi Capital, HSBC, Masterlease and Interleasing (GM Brand). 0121 454 5645 / www.charterhouseassetfinance.co.uk