Which financing model is right for hotel properties? An exploratory study of financing models highlighting the practice and effects of different financing models adopted by hotel industries in USA and Singapore

Abstract

The high debt-financing model adopted by hotel owners in United States had contributed to a large number of foreclosures during the economic downturn. In contrast, the conservative financing model adopted by hotel owners in Singapore had sheltered them through the past recessions. Cultural values may have influenced the types of financing model adopted by hotel owners. Americans have a value system of using borrowed money to invest, while Singaporeans have a value system of saving for rainy days and spending within one’s means. The studies concluded that hotel owners in the United States and Singapore should consider Juglar’s nine to eleven year business cycle as reference (Juglar, n.d.), and adopt a financing model that undertakes an appropriate level of debt at early stage of economic upturns and when the hotel properties are increasingly enjoying high profitability. At the peak of economic upturns, hotel owners should revert to conservative financing model in preparation for potential economic downturns. As hotel business is a high-risk industry, a Quick Ratio of at least 1.5, and Interest Coverage of at least two must be maintained all the time.