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Contents
The Business Plan ............................................................................................................. 3 What the Financiers Want.................................................................................................. 4 Types of Loan Funds Available.......................................................................................... 4 Cost of Debt....................................................................................................................... 6 Some Special Characteristics of Tourism Businesses ....................................................... 6
ENQUIRIES General enquiries or comments regarding the Quickstart Guide to a Tourism Business or the How to Prepare a Business Plan should be addressed to: Tourism Western Australia Destination Development Coordinator Level 9 2 Mill Street PERTH WA 6000 GPO Box X2261 PERTH WA 6847 Quickstart@westernaustralia.com Tel: 08 9262 1700 Fax: 08 9262 1944 westernaustralia.com
DISCLAIMER
This document has been prepared by Tourism Western Australia predominantly from information and data gathered in the course of its activities. No person or organisation should act on the basis of any matter contained in this document without considering and, if necessary, taking appropriate professional advice. Neither Tourism Western Australia, nor any of its employees, undertakes responsibility to any person or organisation in respect of this document.
Cover Page
It should include the name of the business venture, contact name, address and phone number.
Contents Page
Make it easy for the reader by providing details of what is contained in the business plan.
Executive Summary
Keep this to a one page summary of your plan in very simple terms.
Objectives
Objectives should be clear statements of what you intend to achieve.
Business Description
What is the service that you will be offering your customers? Provide additional information about the attributes of your business and what is going to attract customers. Obtain research data which will show that tourism is growing in your area. You should also provide details of business costs, including your working capital needs, your equity contribution to the business and consequently any shortfall in capital.
Market Feasibility
What will be the size of the market necessary to make the business feasible. If you will be attracting market share from existing operators then you will need to provide details of how this will be achieved. If you are going to tap into a new market, again, you will need to provide details of how you propose to do this. Quite simply, if there is no market for your product there is no point in going into business.
Financial Feasibility
Initially, you will need to undertake a preliminary assessment, a pre-feasibility. However, your final business plan will need to demonstrate quite convincingly that the business can stand up to fair scrutiny. This can be a fairly complex part of your business plan. Hence, it is recommended that you use the services of an appropriate financial adviser.
Often banks will nominate their own valuer and their conservative valuations will usually be well below yours.
Personal Details
A statement of your personal assets and liabilities and any other principals involved in the business should be included, as well as any other pertinent details, such as special skills and knowledge, prior experience in the tourism industry and generally anything that will support your case that you are a "fit and proper" person to be running a business.
Statutory Details
Provide details of the business structure, whether a limited liability company, partnership or just yourself as the sole trader. If a company structure is involved you will need to provide details about the directors, company secretary and the location of the registered office.
Appendices
Provide any additional information as necessary in support of your business plan. For example, market research information, statistics, consultant's assessments and so on.
Term Loans Commercial Bills at both variable and fixed rates Overdrafts Bridging Finance Leasing, Hire-Purchase and Chattel Mortgages
Tourism Western Australia
There are very few tailored or packaged products that are aimed specifically at the tourism industry.
Term Loans
Fully drawn advances are granted for capital purchases such as land, buildings, equipment and machinery, or for extensions to buildings. Loan terms can be from three to eight years but are usually about five years. The repayments generally consist of a principal reduction, plus interest on the balance of the account. In some circumstances, fixed rate fully drawn advances can be negotiated for terms of up to five years.
Commercial Bills
General Commercial bills provide short term or long term finance for capital, carry-on or bridging purposes. There is a distinction between a bill facility and a particular commercial bill discounted under that facility. The bill facility may have a term of up to 5 years, but any particular bill will usually have a term from 30 to 180 days. When a particular bill matures, it can be paid out or, if the bank agrees, it can be rolled over by discounting a new bill to take its place. You may also find at times that the bill rate quoted in the newspaper is slightly different from the bill rate you are quoted when you go to your local bank. Bill rates in the bill market vary minute to minute, but for any given bill they are fixed on the drawing date for the term of the bill. Bill rates are continually changing, and so the rate quoted in the paper could be different from the rate applying on the morning of the inquiry. On top of the discount rate, borrowers will pay charges of approximately 2% to 4% to cover the risk margins. When a bill is drawn, the borrowers will not receive funds equal to the face value of the bill instead the interest and charges for the term are deducted from the face value of the bill. A minimum loan of $100,000 is preferred. Fixed Rate Bills These bills are a relatively new source of finance where money is made available for a fixed period with a fixed interest rate. The period of the loan can be up to five years. A minimum loan of approximately $100,000 is preferred. Costs in addition to interest will be 2% to 4%, depending on the size of the loan and the assessed risk of the loan. No principal repayment is made during the term of the loan, but some repayment may be required at the time of the rollover. It is possible to pay out a fixed rate, fixed term bill. Depending on whether bill rates have moved up or down relative to the fixed rate, there may be a penalty involved with this. Obtain a quote prior to deciding to pay out a bill early, to identify the precise net cost or net benefit to you.
Overdrafts
Overdrafts are offered on cheque accounts to permit the account to fluctuate from credit to debit. Overdrafts are made available principally for working expenses. The limit is reviewed at least annually. Banks do not like to see overdrafts used for long term core debts of a business, because overdrafts are repayable on demand. Customers may be able to negotiate a lower-cost long-term finance package rather than simply relying on an overdraft facility.
Bridging Finance
Bridging finance is usually granted to applicants intending to construct their own business premises or wishing to purchase a business while awaiting the sale of their existing assets.
Cost of Debt
You need to keep in mind that most debt financing packages have extra charges which need to be included in the overall cost of using debt. The real cost of debt finance consists of the cost of the interest and other borrowing charges. Use this formula to work it out:
Worked Example
Let's suppose you borrow $20,000 as an interest-only loan from the bank for two years at an interest rate of 10%. That means you will have to pay $2,000 a year in interest. If there is also a fixed establishment fee of $1,000 your total financing charges over the two years before tax will be $5,000. The before tax cost of your loan will be:C o st o f D e b t = ($ 4 ,0 0 0 + $ 1 ,0 0 0 ) 2 $ 2 0 ,0 0 0
= 1 2 .5 %
Tourism products are in fact, services and, as such, there are several characteristics which apply to any service sector, not just tourism, that you will need to be aware of. Seasonality of demand Most tourist destination areas are characterised by fluctuating periods of demand called peaks, shoulders and troughs. Long term market development Very few new businesses achieve maximum capacity utilisation in the early years of operation. Co-operative nature of competition The competitive field for tourism is comprised of destinations. Competition at this level requires businesses, that would normally see themselves as being in competition, to work in a co-operative manner to jointly promote their destination. High fixed costs Many tourism businesses have a high fixed cost component. Single use nature of assets Accommodation facilities in particular have limited alternative uses for the assets. High capital intensity Many tourism businesses require substantial up-front capital investment. Seasonality and long-term market development factors as explained above often mean the asset will initially be under-utilised. The single use nature of some tourism assets can be a disadvantage when making capital gains decisions. Commercial investors can spread the risk across a number of sectors depending on the industry of the occupants. However, there is greater risk when an investment is locked into a single use industry like tourism. Consequently, capital gains for tourism (particularly the accommodation sector) can be lower than other property investments. In addition, some lenders question the security which a single use asset provides. Banks will normally lend to the extent that they believe the cash flow of a business will at least repay the interest of the original loan. As protection for repayment of the principal, however, loans are normally secured over the assets used to generate the income stream. The value of these assets is dependent on what the market will pay for them. An asset with only one end use such as a motel or a tour coach provides less security than assets with application across several industries such as an office building or a truck. In short, many tourism investments present low profit streams in the short term, carry higher risks than many other investments and generally produce modest capital gain. However, the prudent investor who takes the time to prepare a comprehensive business plan and takes a longer term view to tourism investment can reap substantial financial gain. *********