Setting Up Microfinance Groups for the Firms in the Hospitality Sector - Case Study Example

Hospitality Sector

Hospitality industry applies to the companies that focus on the satisfaction of the customers and providing the leisurely needs rather than the necessity ones. The sector is based on offering luxury services that is, why their priority is to ensure customers are happy whenever they visit their business. It also relies on the leisure time and disposable income, doing the business for the rich and tourist. The sector tends to suffer during the recession because there will be a reduction in disposable income hence customers don’t have extra money to spend and enjoy their services. The sector comprises of many businesses other than the hotel business. They include airlines, fancier trains, cruise ships, tourism, restaurants and event planning. ("What Exactly is the Hospitality Industry?", n.d.).

The Saudi government depends on the oil as the backbone of the economy but due to the reduction in oil prices globally, there has been a decline in foreign income injected into the economy. The government has been a forced to look for other sources of revenue so as to continue running the economy efficiently just like before the decline of oil price. Being in Arabia desert, the Saudi government is currently changing to the hospitality industry, in their attempt to attract more injection of money into the heavily oil-dependent economy.

Hospitality Businesses in Saudi Arabia

Hotels

The Warwick International Hotel that has 60 hotels globally, across Europe, United States, Pacific region and the Middle East target to establish one of its branches in Saudi Arabia. This comes due strong performance of the hotel in the Dubai for the first two years ("Warwick Hotels in Middle East expansion", 2016). Also, StayWell Hospitality Group which is the largest Australian hotel management company is expected to open two hotel with 630 rooms in Grand Mosque Makkah by 2018 ("StayWell debuts Park Regis in Saudi Arabia", 2016)

The Mena region offers major opportunities attracting investors and the recent investor being the Colliers International, who opened a hotel in the area. The Hotel director was quoted saying that the forecast is providing the industry professionals with pricing and budgeting strategies as the Mena Hospitality sector undergoes major developments such as online delivery of properties in the mid and long term ("Hospitality Net - Saudi Arabia Hospitality Sector Witnesses Strong Growth", 2015).

Transport

The Kingdom airlines the Saudia has established the low-cost carrier. Flydeal will commence its operation in mid-2017. It carrier will run independently from the national carrier. Also, has cheap public transport like a bus for pilgrims to enable them to complete their pilgrimage to Mecca and Medina. Also, plans to run fast speed train line with carrying capacity of seven trains that will take one hour to complete the journey between Mecca and Medina.

Event Management

The country has hosted various events such as hotel show event where contractors to the restaurants, hotel, food, and hospitality sectors come together and meet the buyers, decision makers and acquires a new trade contract for the future years. Furthermore, the show represents the finest brands, products and services from international dealers to the hotels and hospitality sector. It also provides specialists of products for the food and hotel market and gives 360 degrees view of the hospitality sector to the attendees ("The Hotel Show Saudi Arabia", 2016).

The kingdom also manages to host HORECA event which usually the biggest and longest is running annual exhibition. The event features activities such as workshop, art show, and culinary art. It attracts visitors, exhibitors and key local and international industry players. It also has a modern world class exhibition center in Riyadh known as Riyadh International Convention and Exhibition Center ("SAUDI HORECA: The Biggest Hospitality, Food & Beverage Exhibition in Saudi Arabia", 2016)

Tourism

The government intends to spend eighty billion dollars on infrastructures to boost tourism activities in the country. This is because the tourism sector is likely to add 5.3% toward the Saudi GDP by 2016. Also, by 2018, it is expected to be an increase of five-star hotel each having an average of 421 rooms built in the country. In addition, a rare documentary that was shot in the Kingdom showing its mountains, deserts and ruins trying to restore its position as the undisputed world open Museum with antiquities dating back to the age of Paleolithic ("SCTH - Saudi Commission for Tourism & National Heritage", n.d.).

Source of Funding

Specialist Lenders

In 2012, RSM Tenon carried out a survey in Hospitality and Leisure industry; the study indicated that forty-seven percent of the businesses in the sector seek additional funds from other sources rather than the bank. This is because the bank denied them the loans to fund and expand their business. Due to the urgent need of financial aid, the sector has turned to other sources of funding such as specialist lenders. This has led to increasing in a number of specialist lenders entering the hospitality sector with the intentions of assisting the hoteliers by providing loans to refurbish or invest in new kitchen tools. Ashley Business Cash and Boost Capital are among the new lender who have joined the growing number of specialist Lenders in the UK during 2012. Their main intention was to help the hospitality businesses access capital. The Boost Capital expects to lend more than ten million pounds to UK hospitality sector to assist them develop, or assist them to improve by purchasing new stock, or investing in devices or refurbish their bedrooms. Also, there are lenders such as First Merchants who has specialized in lending cash to the sector’s businesses that need to obtain a lease on apartments by providing them with necessary financial aide to acquire new buildings ("Hospitality funding: Specialist lenders", 2012)

Leisure Fund

Leisure Fund is a new UK funding program for leisure business designed to allow them to take loans of one hundred thousand pounds to ten million pounds on either secure or insecure basis. According to Taylor, he says they have heard the needs of the Leisure clients and attempt to design something unique to supporting the needs of the entertainment industry. This is because the it is a vibrant industry and vital for the economy of the UK as it generates around ninety-seven billion pounds of gross domestic product and provides jobs for nearly two million people ("Hospitality funding: Specialist lenders", 2012).

In Saudi Arabia, the SHUAA Capital Saudi Arabia provide investment funds to hospitality and real estate industry. Some of the projects include Jeddah Centro project, Dammam Rayhaan project, and Riyadh Centro project. Furthermore, the hotelier can seek additional financial resources from international groups such as Gulf Finance Corporation UAE that provide loans for the sectors including small business loans, consumer loans, business vehicle finance, and most of its client operates in the following industry logistics, manufacturing, construction, travel, and tourism. Therefore, the corporation act as an external source of funds to the Kingdom’s hospitality industry.

Consistency

James Beresford was quoted saying that their reputation as the high quality to visit depends on their ability to offer a top quality experience across all industries in the economy. Continuous re-investments is, therefore, necessary to maintain consistency – the thing that is critical in their attempt to secure the repeating visitors and also the newcomers. The consistency is one way of funding the hospitality sector. Furthermore, customer satisfaction is their main priority of the businesses in the sector, maintaining consistency in providing high-quality services to customers will make them come over and over again. The repetitive customers’ habits then could enable the hoteliers to raise sufficient money to fund their expansion activities with or without bank loans ("Hospitality funding: Specialist lenders", 2012).

Private Equity

If the banks have refused to offer loans to the Saudi hospitality businesses, the business has exhausted all their resources and have nothing to invests, unable to borrow extra money from family members and friends because they too have no money. Private equity would be an attractive option to seek more funding. If the Saudi hoteliers want to expand their businesses, it is always better to give an equity stake, and a board seat of their businesses and in return receive financial assistance to fund their expansion activities. The benefit of private equity, the hoteliers will enjoy is that the private equity investors will work very close with the hotel owners in ensuring their businesses develop as planned (Lerner, Hardymon, & Leamon, 2012).

Maintaining good personal relation with private equity investors will enable the hoteliers to discuss the key point of the investors’ criteria the amount they intend to invest, the duration and the values they plan to add to the business. During their withdrawal time, the business will have grown robustly. Therefore, the private equity is the right way to seek financial assistance in case the hoteliers have exploited all option for funding.

The hotel and another business could sell their products and services more than it costs to produce that is minimizing the cost while maximizing the benefits hence making more profit. It is usually the primary source of funds to the business. The profit could then be invested back into the firm to expand its activities rather than focusing to banks to support their operations (Zwilling, 2014). The other way the sector could raise funds to sponsor it development activities is through borrowing. It can be private or public borrowing. The private borrowing is through the banks while public one is seeking funds from the public. Now that the private borrowing is not possible for the business because the banks have declined to offer them the assistance needed, the company could go public and seek more finance from the public.

The firms in the hospitality sector can set up a microfinance group such as Crowd funding where by all the business in the sector could contribute a small amount of money and then use the money to provide loans to the business that need urgent financial aid to fund its activities. Peer-to-peer loans is a process of creates a business in touch with their private lenders, creating a business relation between the hoteliers and the lenders – fosters trust and patience. An example of such site includes Zopa and Funding Circle. It removes all fee on loan applications, interest rate reduction on borrowers who repay their loan early. It serves as one way that the hoteliers could raise the financial assistance needed to run its activities ("10 ways to fund your business without a bank loan - Startups.co.uk: Starting a business advice and business ideas", 2016).