Travel agency business loans and finance for tour operators

Travel businesses take in large sums that are not theirs. A customer's deposit and balance for a holiday pass through the agency's accounts, but most of that money belongs to the airline, hotel or tour operator, and much of it is protected for the customer in case of failure. The business's real income is the commission or margin it earns, which may be a small fraction of gross bookings and, for agents, is often only confirmed or paid around the departure date.

That creates two problems for lenders. Bank statements look far stronger than the underlying business, and the large balances cannot be relied on to repay a loan. An application that presents gross bookings as turnover will be marked down by any experienced underwriter, so it pays to present the numbers properly from the start.

Businesses selling flight-inclusive packages to UK customers generally need an Air Travel Organiser's Licence from the Civil Aviation Authority, or must sell as an agent for an ATOL holder; the CAA's guidance on whether you need an ATOL sets out the tests. ATOL holders must meet the CAA's financial requirements and, depending on their circumstances, may have to provide bonds or other financial security at renewal.

For packages without flights, the Package Travel and Linked Travel Arrangements Regulations 2018 require organisers to protect customer payments against insolvency, typically through a bond, insurance or a trust account; the government's guidance on the package travel regulations explains the options.

For finance, the practical points are these:

• Money in a trust account cannot be used as working capital or charged to a lender, and lenders' security over the business will not reach it.
• Bond providers may ask for cash collateral or a counter-indemnity, which ties up cash that would otherwise fund the business.
• A lender will want confirmation that your ATOL or other protection is current, because losing it would stop most of your sales.

• Meeting financial requirements or bond collateral at ATOL renewal or when growing passenger numbers
• Paying supplier deposits for group allocations, charters or event packages before customers have paid in full
• Funding the gap between paying suppliers and receiving payment from corporate clients on credit terms
• Refitting a shop, or investing in booking technology, a website and digital marketing
• Covering the quieter months after the January to February booking peak, when commission has been earned but not yet received
• Buying another agency or a book of clients

The danger in travel is borrowing on the strength of money that feels like the business's but is not. If a loan is serviced from customer deposits and departures then fall, the business can find itself unable to pay suppliers or refund customers. Model repayments on margin alone.

Before borrowing to meet a bond or financial requirement, ask whether a different protection route, such as a trust account, would free cash. For acquisitions, see our acquisition finance page, and if the funding is to grow an events side, our guide to events business finance covers that model.