Getting Religion About Receivables
Study the financial statements of virtually any interval resort, campground or vacation club company and what is their largest asset? Receivables. What generates the most cash flow? Receivables. Where is the greatest long-term value (and often the largest contingent liability if the receivables are financed)? Receivables. Yet most interval resort, campground and vacation club principals devote scant attention to their receivables portfolios. Instead they focus on the “sexier” aspects of their business (such as sales and marketing, development, and construction), leaving their receivables to be managed by back office personnel or receivables lenders – this is an error of great magnitude.
We have spent a lot of time and money financing interval resort, campground and vacation club receivables. If you include our “time served” prior to forming Whitebriar Financial Corporation (during which we worked for developers, became developers ourselves and worked-out troubled receivables portfolios) we have been financing interval resort, campground and vacation club receivables for over twenty years. Our experience has taught us more than most folks want to know about interval resort, campground and vacation club receivables. What follow are eight short lessons we have distilled from our experience. We preach these to our borrowers and clients, so that they can get the most out of their receivables and their receivables lender(s). We share these lessons with you in the hope that you will profit by them as well.
- Beware of “Cheap” financing, because Money (like every other commodity) really is worth what you pay for it. Low interest rates and liberal terms connote an expectation of low risk. “Cheap” lenders often take a “cookie cutter” approach to financing interval resort, campground and vacation club receivables, assuming that such transactions are analogous to financing residential mortgages, automobile loans, boat paper and the like. In reality, financing interval resort, campground and vacation club receivables is a complex and somewhat risky business. Lenders who understand your business will price and structure their transactions realistically.Realistic lenders will price their portfolio financings aggressively enough so that they can absorb unexpected delinquencies and remain profitable in an economic downturn or “credit crunch.” Realistic lenders will structure their portfolio financings in a way to mitigate risk and maximize flexibility – the result is that they can stay “in the game” when you need them most. Sure, realistic lenders will cost you more at the outset, but they will be far cheaper in the long run. They will not pull back, fail to fund or even file for Bankruptcy like “cheap” lenders do when economic conditions get tough. Never forget that a fair degree of flexibility is necessary between the lender and the borrower in order for a receivables financing relationship to be profitable for both. A realistic lender can afford to be flexible; in fact a realistic lender may see an opportunity where a “cheap” lender sees only red ink and unhappy shareholders. The bottom line – Choose receivables lenders who understand your business and for whom financing your receivables is profitable.
- Avoid financing Long-term Receivables, because long-term receivables generally mask real problems like marginal buyer affordability or low buyer commitment. We all recognize that initial rescission rates are lower when your salespeople write longer-term paper, because of the smaller monthly payment. But look past the higher “net close”, and the apparent lower marketing cost. What about the overall, lifetime default rate, and the real costs associated with borrowing on a longer-term receivable?In our experience, stretching the maturity of most resort, campground and vacation club receivables beyond six or seven years (72 – 84 months) usually increases the total (lifetime) default rate. First of all, we have learned through hard experience that when a customer will only buy on long-term financing, usually he/she is either: i) barely able to afford your product and likely to default in any economic downturn or temporary reduction in financial capacity; or ii) not really committed to the purchase and ready to default the moment some vacation or amenity is not perfect. Secondly, customer incomes, lifestyles and expectations change over the years, and the longer the term of your receivable the greater your exposure to such changes. Thirdly, developer objectives and debt tolerances change too, as does the cast of characters at most lending institutions. Never lock your company into nine-year, ten-year (or longer!) recourse guarantees. The bottom line – If you must write long-term paper, don’t borrow against it; instead hold it in-house.
- Don’t finance receivables that are secured by Less Popular products. It should be no secret that consumers pay best when they are satisfied with the purchased product. In recent years improved fulfillment, points, and flexible use programs all have gone a long way to equalize the perceived value of varied vacation products. However, the fact remains that certain seasons, units, programs, benefits, etc. within each developer’s product menu are simply more desirable than others.As the originator of financed interval resort, campground and vacation club sales, you know what are the most (and least) satisfactory products in your mix, and therefore can predict accurately which financed customers will be more (and less) likely to pay. The bottom line – Remember how important customer satisfaction is in determining receivables performance, and plan your receivables borrowings accordingly.
- When it comes to interval resort, campground and vacation club receivables, substantial Down Payments and EFT/Direct Debit are more relevant than credit scores. Despite the FNMA/GNMA loan underwriting approach of many lenders, credit scores are much less important when underwriting resort, campground and vacation club receivables than they are when underwriting residential home mortgages or automobile loans. As a good friend in the timeshare industry used to remind me, “Rarely does someone wake up in the morning, turn to his/her spouse and say, ‘Hey honey, let’s go out and buy a timeshare today!'” Interval resort, campground and vacation club products are non-essential luxury products that must be sold rather aggressively. Despite the strong efforts of ARDA, the major brands and other leaders to upgrade our industry, the fact remains that interval resort, campground and vacation club products and sales methods do not always appeal to prospective purchasers with ideal credit scores.Income, payload and prior credit history (i.e. the “credit report”, “credit score” or “credit rating”) are great indicators of your customers’ ability to pay, but they tell you nothing about your customers’ willingness to make payments for your product, or their level of commitment to your product. On the other hand, when a purchaser willingly pays 20% (or more) down on a financed purchase, you can be reasonably certain that he/she really wants your product and will make timely payments; moreover, he/she already has made a substantial investment and is unlikely to walk away from so much money. When a customer also gives you permission to debit his/her checking account each month via EFT (ACH), or to charge their debit or Visa/Mastercard each month, again you can be reasonably certain that he/she really is really committed to your product and will make timely payments. Now if you happen to glean from their credit report that the purchaser has successfully financed timesharing or similar vacation products before, that is a very positive and relevant indicator.Seek out lenders who will finance “marginal” and even “poor” credits who have made the requisite down-payment or signed-up for EFT/Direct Debit. At Whitebriar, for example, we usually find a way to finance all of our borrowers’ financed sales, so that they are never out-of-pocket for marketing and commissions expenses. The bottom line – The Donald Trumps of the world have great credit, but they rarely buy interval resort, campground or vacation club products. The Johnny Lunchboxes of the world regularly buy your products, but may not have such great credit. Get a strong down payment from the Lunchboxes, sign them up for EFT/Direct Debit, keep the couple or family happy, and the Lunchboxes will pay, despite less than perfect credit.
- You must pay your Salespeople to write better receivables. As noted above, we have found that shorter financed terms, higher down payments, and EFT/Direct Debit will improve the quality and performance of your receivables portfolio. However, the last thing successful salespeople worry about is the quality of the receivables they write for the developer. Salespeople must take the path of least resistance with every closing unless there is a monetary incentive to do otherwise. Successful salespeople, especially in the interval resort, campground and vacation club industry, are primarily motivated by money – they look no further than the next commission check. Recognizing this, you must establish higher sales commissions and over-rides for shorter terms, higher down payments and electronic funds transfer.Also, consider factoring the long-term default rate of a salesperson’s deals into his or her commission multiplier. Sometimes the “heat” pitched by certain salespeople may not be evident until many months after the sale, but may still be a significant factor in the subsequent default. Often you will find that the “monster closer” who writes 1 sale for every 3 tours turns out to be only 1 for 5 when subsequent defaults are taken into account, while a modest 1 for 4 closer may have far fewer subsequent defaults and actually generate the same (or better) net revenue. The bottom line – Align your salespeople’s goals with your own and you will be successful. Ensure that salespeople who write good receivables make a lot more money than those who write weak receivables, and suddenly you will only have good receivables.
- Interval resort, campground and vacation club developers on Recourse should Never give up control of Delinquent Collections. Few lenders or collection agencies can collect a developer’s receivables as well as that developer. The interval resort, campground or vacation club itself controls (indirectly or directly) the entire fulfillment process, including property access, vacation reservations, amenity use, exchange rights, membership benefits, etc. Very few lender collection departments or collection agencies can assist a disgruntled owner with an exchange, schedule a difficult vacation, rectify some real or imagined problem with a resort, or get the owner a free overnight stay. However, steps like these are often exactly what’s required to salvage a delinquent receivable, or to keep a problem receivable current.No lender or collection agency understands as well as the interval resort, campground or vacation club how the financed product was sold, and therefore what “buttons” to push in “re-selling” the product to cure a delinquency. However, we have learned that the best collectors in the industry often do just that: Re-sell the financed customer on the benefits of what he or she is buying. In the process, a good, “in-house” collection department will do more than lower the default rate (which is beneficial to lenders and developers alike); it will also increase owner satisfaction, complement maintenance assessment collections, and occasionally lead to referrals, upgrades and re-load sales.Note that allowing the developer to handle delinquent collections need not compromise the lender’s cash flow or control of the payments – the “in-house” collection department can simply direct debtors to mail (or forward electronically) their delinquent payments directly to the lender or the lender’s designated service bureau. The result will be less delinquency and improved cash flow for the lender. Remember, if the lender or service bureau perform collections, they have no real incentive to salvage delinquent accounts because they can just call on the developer’s recourse guarantee and get a new, current receivable to replace the delinquent one. By the time the developer gets back a “defaulted” receivable on recourse, the account may be uncollectible, a total write-off. This same account might have been salvaged had an “in-house” collection department been able to intervene when the account first became past due, either avoiding a recourse liability altogether, or at least preserving potential residual value. The bottom line – Keep delinquent collections “in-house”, especially if you’re selling or financing receivables with recourse, even though the servicing and billing may be released.
- Play the Field – never place project financing and receivables financing from the same project with the same lender, and never finance all your receivables with one lender, regardless of whatever favorable terms may be offered. As recent cut-backs, failures and bankruptcies by industry lenders remind us, many a sound project has failed when the lender couldn’t perform as promised. Establishing and maintaining multiple lending relationships may be time-consuming and more expensive at the outset, but such a strategy will pay off handsomely for developers when their lending institution fails, is sold, changes management or alters its lending practices. Be especially wary of lenders who are publicly traded, ripe for acquisition, or who are subject to excessive state or federal regulation; the lending climate literally can change overnight at such institutions.Establishing and maintaining multiple receivables lending relationships will also pay off for developers who change the composition of their portfolios or have an unusual financing request. For example, suppose you need to borrow against your maintenance fees, do you have a lender who can accommodate you? Suppose you suddenly need to finance new or different product receivables, such as a “club”, quarter-shares, fractionals, home-sites, points, RV/Boat clubs, back-end vacation packages, right-to-use, dock-o-miniums, or campsites, etc. You may need receivables financing quickly, and would be wise to have several places to take such requests.
- Never Forget the End Game – he or she who has the most money at the end of the game is the winner. Every interval resort, campground or vacation club should maintain the discipline necessary to hold at least ten percent (10%) of financed sales in-house, in addition to any reserves required by receivables lenders. This in-house portfolio can become your “pot of gold” long after the sales are over. Initially your in-house portfolio will be comprised of longer-term paper, as noted above. Ultimately it will grow well beyond 10% of your financed sales, as you add salvaged receivables that have been replaced or repurchased from lenders under recourse guarantees, plus any “credit-reject” receivables (if your lender has a policy of rejecting low credit scores).Receivables lenders must be equally disciplined. Receivables lenders should always overmatch their book. That is – ensure that the maturity of any capital notes or borrowings is far longer than the maturity of your financed portfolios, and ensure that your aggregate operating costs and debt service requirements are far lower than the anticipated receipts on your financed portfolios. Generally, receivables lenders should shy away from long term commitments, instead issuing annually renewable facilities. This is because long-term relationships often become strained when a borrower and lender are “locked-into” an inflexible deal. Receivables lenders should generally hold liquid reserves (over and above any anticipated receipts on existing loans) in excess of their next 12 months commitments, and should hold an additional “contingency fund” equal to or greater than 10% of their total outstanding loans. Finally, lenders should price and structure each transaction in accordance with the risks and collateral unique to that transaction – as noted above, a “cookie cutter” approach is ill-advised in financing interval resort, campground or vacation club receivables. The bottom line – The only relevant totals are the final totals.
This Article Reprinted from The Resort Trades with the permission of the publisher. The author is the President of Whitebriar Financial Corporation. Whitebriar provides receivables financing to the interval resort, campground and vacation club industry. You can contact Whitebriar at www.Whitebriar.com, or telephone them at 508/428-3458.