Hotel Credit Risk Sees Steady Drop

Hotels are seeing a steady decrease in bad debt and credit risk from customers, according to a seven-year study from PKF Hospitality Research, an Atlanta-based consultant to the hospitality industry.

The study tracked the doubtful account provisions and credit card commission expenditures of 681 hotels – mostly larger, chain-affiliated properties – for a period covering 1999 through 2006. Hotels typically create a monthly Provision for Doubtful Accounts of those receivables they don’t believe will be collectible, according to “Bad Debt and the Use of Credit Cards in U.S. Hotels” by Robert Mandelbaum and Alvin Minsk.

The study tracked the ratio of the provision for doubtful accounts as a percent of total revenues and reported it declined from a high of .16 percent in 2001 to .09 percent in 2006.

Mandelbaum, director of PKF’s research division, attributes the improvement to hotels doing a better job of collecting their outstanding receivables. Also, hotels had greater leverage to negotiate payment of advance deposits from corporate and group accounts as the economy improved in the last several years.

Hotels got better in managing their receivables as the credit card use increased, says Mandelbaum. He says that credit card commissions averaged 1.7 percent of total revenues from 1999 through 2002, but jumped to 1.9 percent in 2006. Credit cards, then, do most of the heavy lifting for the hotels, which now carry less risk than with the old model of billing individuals or groups after check-out, says Mandelbaum.

Hotels have also gotten better at assessing the creditworthiness of accounts, Mandelbaum said.