Factoring for Hospitality Businesses

Why hospitality businesses run short of cash

Much of hospitality is paid at the point of sale. A guest checks out and pays by card, or a diner settles the bill before leaving. Those sales are not invoices and cannot be factored.

The cash gap shows up on the business-to-business side. A hotel hosts a corporate group and bills the master account after checkout. A venue runs a conference and invoices the organizer for food, beverage and audiovisual services. A caterer serves a company event and sends an invoice on 30-day terms. A linen, staffing or event services firm bills hotels and venues every month. In each case, the work is done and the costs are paid before the client pays.

The costs are front-loaded. Food and beverage must be bought before an event. Banquet staff, cooks and setup crews are paid on the next payroll. Rentals and decor may need deposits. If a business client pays 30 or 45 days later, the provider funds the event out of its own cash in the meantime.

Seasonality makes it harder. Conference seasons, holiday parties and wedding months create bursts of activity. A business that books a strong quarter may run short of cash at the peak, because it is paying for many events before collecting on any of them.

If you serve federal agencies, payment timing is set by regulation. Under FAR 32.904, payment on most federal supply and service contracts is due 30 days after the later of a proper invoice being received or the government accepting the services.

What can and cannot be factored

Factoring is the sale of a business receivable. To qualify, the invoice generally must be:

• Owed by a business or institution, such as a corporation, association, government agency, university or another hospitality company.
• For goods or services already delivered. The stay is over, the event has happened, or the month of service is complete.
• Not subject to an open dispute or a large pending credit.

That usually excludes guest folios paid by card, walk-in sales, deposits for future events and bills owed by individual consumers, such as a private wedding client. Some factors will look at invoices to individuals case by case, but most focus on commercial accounts.

How a factoring cycle works for hospitality

1. The event, group stay or service period ends.
2. You reconcile the final bill with the client: headcounts, room nights, food and beverage, and any extras.
3. You send the final invoice with signed banquet event orders, group contracts or service records.
4. You send the invoice and backup to the factor. The factor confirms it with the client and advances an agreed share.
5. The client pays the factor.
6. The factor releases the reserve, minus its fee.

What factors look at

• The client's credit. Large companies, associations, universities and government agencies are easier to approve than small or new organizations.
• Signed contracts and event orders. Factors want documents showing what the client agreed to buy, including any minimums.
• Final reconciliation. An invoice the client has already confirmed is far easier to fund than one still being adjusted.
• Concentration. A venue that depends on one organizer, or a service firm with one hotel group as its main client, may face limits.
• Existing liens. Hotel and restaurant owners often have mortgages or equipment loans. If a lender's lien covers receivables, it must be released or subordinated.

Costs and how they're quoted

Factors quote hospitality businesses individually. The rate depends on your monthly invoice volume, the credit of your business clients, and how long those clients actually take to pay. Seasonal volume can affect pricing too, since some factors charge minimums in slow months.

Fees may be flat or tiered by days outstanding. Calculate the total cost of a typical event invoice at your clients' real payment speed, and add setup, wire and minimum fees. Compare that to your margin on the event, since food, beverage and labor costs are high.

Pitfalls specific to hospitality

Attrition, minimums and cancellation charges

Group and event contracts often include charges if the client uses fewer rooms or covers than promised, or cancels. Clients dispute these more often than charges for services actually used. Factors may treat such charges as harder to fund. Under UCC 9-404, a factor takes your invoice subject to the client's defenses from the same contract.

Final bill disputes

Headcount disagreements, service complaints and billing errors can lead to credits after the event. Under a recourse agreement, reductions usually come back to you. Reconcile with the client before factoring.

Deposits already paid

If a client paid a deposit, the factored invoice should reflect only the balance due. Invoicing the full amount without crediting the deposit will cause a short payment and a chargeback.

Notice and payment instructions

After proper notice, UCC 9-406 requires the client to pay the factor. If the client pays you anyway, you must pass the money on quickly. Update payment details with each client's accounts payable team.

Seasonal minimums

Contracts with monthly minimum volumes can cost you in slow months. Check minimums, renewal terms and exit fees before signing.

When to look at other financing

• Larger deposits and progress payments. Asking business clients for bigger deposits or a payment before the event reduces your cash need.
• A bank or SBA-backed line. The SBA's 7(a) Working Capital Pilot provides monitored lines of credit through participating lenders. Seasonal businesses can also ask lenders about the SBA's Seasonal CAPLine, which is meant for seasonal increases in receivables and inventory.
• Shorter terms. Due-on-receipt terms for smaller clients can cut collection time.

Factoring does little for a business whose revenue is mostly card sales, and it does not fix a cash problem caused by losses or underpriced events.

Frequently asked questions

Can a hotel factor its room revenue?

Only the portion billed to businesses on terms, such as corporate group master accounts. Guest card payments are not invoices and cannot be factored.

Can a caterer factor wedding invoices?

Usually not. Weddings are typically billed to individuals, and most factors focus on business clients. Corporate and institutional catering invoices are a better fit.

Can I factor an event deposit invoice?

Generally no. A deposit invoice is for an event that has not happened, so the client can still cancel. Factors prefer invoices for completed services.

Will my corporate clients know I factor?

In most cases, yes. The factor sends a notice of assignment and the invoice shows the factor's payment address. Large organizations handle these routinely.