The amount and type of funding available for a new hotel project will depend on the financiers’ perception of the risk-return relationship on the investment. It is therefore clear that to obtain funding for a project, it will first and foremost be necessary to demonstrate project viability. The viability of a project refers to the potential of a proposed project, assuming effective management, to deliver the required rate of return to its investors.

Traditionally, project viability is determined by a number of key components. Market research and analysis should allow the developer to determine the most appropriate location, size, and standard for the project, as well as the type and number of facilities it should offer. Indicative financial projections, based on the market analysis, should enable a refining of the project variables and give an indication of the viability of a project. It can then be argued that, barring any major external disruptions and developments, and given appropriate management, the project should be able to deliver projected profits. Subsequently, a return on investment can be estimated and appropriate funding sought.

The financing structure of a project will, at least to a certain extent, be dictated by the viability of the project. However, small changes in debt ratios, interest rates and payment terms, influence financing costs so significantly that it can also be argued that the actual structuring of funding received does influence the cash flows of a project.

In order to structure the financing of a project in such a way that cash flow is optimized, the following can be considered:

Maximise debt/ Reduce equity requirements: Depending on the project returns and interest rates, the higher the debt funding for a project, the higher the return on equity. At the same time however, financiers are often reluctant to provide more than 50% of hotel start-up financing costs. For financiers to be persuaded to take up more debt, the following can be considered:

· Provide performance sureties based on guaranteed performance. Financiers’ exposure is limited and they will be more willing to provide funding;

· Create artificial levels of debt by attracting different investors to take up different financing profiles. Varying ratios, interest rates, and payment periods will affect the risk to the respective financiers, thus enabling the financiers to dictate the risk they are willing to commit to.

· Provide quasi-equity by extending shareholder loans instead of shareholders providing up-front share capital. Based on the project and negotiations, such loans may be repayable on a fixed term basis.

Reduce interest rates and increase the repayment period: Depending on a resultant negotiated financing structure, and considering the risk-return relationship for financiers, interest rates and repayment periods on both the senior and mezzanine debt portions should be negotiated with the financiers.

Conclusion: Although some of the above actions are particularly relevant to Africa, many of the actions suggested would also be applicable in financing scenarios elsewhere in the world. The ultimate challenge in obtaining the most competitive funding in Africa is to be adaptable and alert.