Why Leasing Is The Best Form of Financing For Hotels

As a hotel owner or manager in the hospitality business it is impossible to avoid ongoing expenses for equipment, furnishing and décor. Beds, dressers, air conditioners and style fads don’t last forever. Finding the right way to pay for your needed upgrades can be a real challenge.

Finding the right way to pay for your needed upgrades can be a real challenge.

One of the most common instances when a hotel owner will find him or herself needing renovations is when they change the flag of their hotel. Switching from one franchise to another can dramatically increase name recognition and bookings, but often the new parent company will demand that sweeping changes be made to the property itself. From the furniture style to the façade to upgrades to basic equipment, you may have to change everything from the basement to the penthouse. For the most part you and not the parent company will be required to pay for all of these changes.

Unfortunately most hoteliers make the wrong decisions when they need to renovate, upgrade or initially stock their facility. Some times they use cash from their working profits. More often they seek lines of credit from their local banking institution. These mistakes can have serious negative financial repercussions that they are not aware of.

When you take money away from your current profit accounts to pay for upgrades you are needlessly draining resources that could be put to considerably better use. In addition, lowering your capital reserves puts you at a financial risk should your market turn sour or bookings begin to dry up. Events beyond your control, such as the weather, can often make what was a vacation paradise one year into a holiday pariah the next.

Getting a line of credit from the bank is also a bad idea.

Getting a line of credit from the bank is also a bad idea. When you use your line of credit you will be purchasing your equipment and furnishings outright. Unfortunately that means that when you need to upgrade again in a few years you will be stuck having to store or unload your current inventory – often at a severe loss. Beyond that, you are increasing the amount of assets attached to your business, which will increase your tax burden.

When you lease, you are able to get rid of your equipment with no additional expenses when you are ready to upgrade again and commence a new lease, usually after two, four or six years. Because you will not own the equipment you are not building up taxable assets and your lease payment becomes a tax write off.

The amount of your lease will not affect your personal credit score.

Even better, the amount of your lease will not affect your personal credit score. The lease is tied directly to the furnishings and does not show up on one’s personal credit score. That means that when you want to apply for a mortgage or a new credit card you won’t have your equipment expenses holding you back.

It should be noted that equipment is not the only lease-able asset available to the hotel industry. One little known, but increasingly popular option is to lease your franchise fee. That way you can keep more cash reserves and have more time to build both reputation and profits.

People who are just getting started in the hotel industry are sometimes tempted (or encouraged by their bank) to include the cost of their equipment in their property mortgage. Don’t do it! Why would you want to take on a long-term debt to pay for items that will have to be replaced years before you make your final mortgage payment? Imagine paying for your furniture for 25 years after it has been sold off or kept in storage!

At GCR we believe that the advantages to leasing hotel equipment far outweighs any reasons you might consider borrowing money from your bank.

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