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According to Statista, U.S. hotels and motels comprise a $258 billion industry. Itâs no wonder that so many entrepreneurs seek hotel and motel financing every day to capitalize on their piece of the pie.
Hotel financing can be used to buy a hotel, motel, resort, or bed and breakfast, renovate or expand one that you already own, or even maintain one and keep it up to standards. You can also use hotel financing to buy into a hotel franchise.
There are many small business loans available to finance your hotel or motel venture, but some are better than others, depending on your needs.
As you probably already know, growing a hotel business, then running and improving it to stay competitive takes a lot of capital, which is where a small business loan comes in. Here, youâll learn more about hotel financing, how it works, and the best hotel financing options available to you.
Where can I get funding for my hotel or motel business?
While small business owners have traditionally received financing through a bank loan, financing options have shifted. There are more ways of accessing hotel financing than in previous years. The most notable include the Small Business Administration (SBA) and online hotel lending marketplaces, also known as alternative lenders.
It is a great deal more challenging to get hotel financing through a bank or the SBA than it is through alternative means. Both have more rigorous underwriting processes, lengthy wait times, and tougher criteria to meet for loan approval.
Many hotel owners prefer online lenders like Biz2Credit due to their easy application process, quick approval times, and fast funding solutions.
What types of hotel business loans are available?
While running your hotel, youâll need various types of small business loans.
For instance, you might want to purchase new property or real estate, expand your business, make upgrades to your hotel or purchase new furnishings, or you may want to purchase an existing hotel or franchise.
Or, as many small business owners experienced during the height of the Covid crisis, sometimes you simply need financing to help pay for operational costs. Thatâs because 8 out of 10 hotel rooms stayed empty during the onset of the pandemic.
There are various types of hotel loan products available for almost any need, including the following:
SBA hotel loans
The Small Business Administration has a few loan programs available for hotel entrepreneurs in need of funding. The most popular programs are its SBA 7 (a) and 504 loans.
SBA loans are a great option when you want easier loan terms for your hotel financing. These loans are obtained through lenders who have been pre-approved by the SBA to administer the loans.
The SBA offers loans up to $5 million and guarantees part of the loan, usually up to 85%, if a borrower defaults on the loan.
But the loan application process for an SBA loan is quite extensive and it could take months before you receive funding, if youâre approved at all, because the underwriting requirements are somewhat rigid.
The SBA usually requires its borrowers to have a minimum credit score of 650, in addition to other requirements, including proof of a minimum annual revenue ($100,000 minimum in many cases).
Youâll also have to produce other financial documents, such as profit and loss statements. You will also likely have to provide collateral for your SBA loan if you borrow money for something other than real estate or equipment.
You can use an SBA loan towards the purchase of an existing hotel or motel, hotel construction, furnishings or equipment, or working capital needs. An SBA 504 loan can also be used to refinance similar hotel debt.
Repayment terms for an SBA loan are typically up to seven years for working capital loans, up to 10 years for equipment or furnishings, and up to 25 years for real estate purchases.
Overall, if you have time to wait for financing and can qualify, an SBA loan is one of the best hotel financing solutions there is.
Short-term loans
For more urgent financing needs, a short-term loan is likely one of your best bets. Short-term loans are great to cover a business emergency that you didnât anticipate or help meet cash flow targets to pay for operational expenses. It can also be used to have enough working capital to pay bills or meet other expenses.
Short-term financing can also help you take advantage of an opportunity that requires you to move fast. For instance, letâs say that you have been considering replacing the furnishings of your hotel business, and the expensive furniture youâve had your eye on for months goes on sale. A short-term loan can help you get what you need for your hotel while extending the costs for you, making it more affordable to pay it off over time.
A short-term loan will give you a lump sum of cash that is paid back over a set timeframe. As the name implies, a short-term loan has a faster repayment period than many other types of hotel loans, typically from one to three years.
Because short-term loans are processed quickly, they also tend to have higher interest rates. But because you pay the money back quickly, the interest doesnât accumulate as it does with longer-term financing solutions.
Plus, some of the more reputable short-term loan providers, such as Biz2Credit, can offer competitive and affordable loan terms. One of the great things about a short-term loan is its flexibility, which allows you to use your loan funds however you wish. But sometimes you need collateral if youâre going to use a short-term loan on whatever you want.
Nearly every type of lender, from banks to credit unions to the SBA and alternative online lenders, offers short-term loans. But only an alternative lender like Biz2Credit provides faster funding solutions that are more likely to be approved, with funds deposited in as little as one business day.
Commercial real estate loans
The hotel industry is one where you will likely need a commercial real estate (CRE) loan at some point in operating your business. While a CRE loan from the SBA would probably have the best terms, theyâre hard to get, especially if your financials arenât up to par or you lack perfect credit.
Thankfully, there are other loan options. Because the hospitality industry moves fast, most hotel owners prefer the type of fast funding they can get with a hotel bridge loan or an online lender.
Commercial real estate loans can have anywhere from a one-year term to a 25-year term, depending on where you get your loan. You can usually borrow up to 6 million with most lenders, including Biz2Credit, and the interest charged on your CRE loan can range from 5% with banks and the SBA to 30% with hard money lenders. Some online lenders like Biz2Credit have hotel financing rates that start at a competitive 10%.
A lender will usually evaluate your loan application by looking at your credit score, the real estate collateral value, and how long youâve been in business. A bank will usually require a credit score of at least 700 while an online lender usually finds a credit score of around 660 adequate.
Business line of credit
Business lines of credit work like credit cards or a credit line you might have taken out for your home. A lender grants you access to a revolving line of credit for a specific amount of money and you can borrow against the line as needed.
With a line of credit, you only make payments when youâve accessed some of the credit line and you only pay interest on the amount of credit youâve used. If you borrow against the entire line of credit, once you pay it back, your credit limit goes back to the original set amount.
A business line of credit can range from $5,000 to $1 million. It may not give you enough funds to take care of major real estate purchases, but can be enough financing to help cover ongoing hotel business expenses, renovations, furniture, or other lower-range expenses.
Typically, youâll have six months to five years to pay off the credit extended to you. The requirements for a business line of credit vary from lender to lender.
Equipment loans
Hotel equipment financing can be used for a broad scope of items that arenât necessarily considered equipment by most people, including furnishings like dining room tables and chairs, kitchen appliances, and guest room furniture, as well as furniture for other areas in the hotel, cleaning equipment, and just about anything you can think of that makes your hotel functional.
No extra collateral is required for an equipment loan because the items being financed serve as collateral. But the term of an equipment loan is limited to the life of the items being financed. For example, if the items being purchased with the loan proceeds have a useful life of three years, most lenders will allow a maximum of three years for you to pay back the loan.
Hotel bridge loans
Bridge loans are exactly what they imply: they are financing that allows you to get funding right away until you can get more affordable, harder-to-qualify-for funding down the road. As such, bridge loans are usually short-term loans with alternative lenders.
Hotel bridge loans are great when you want to seize a business opportunity and donât have the stellar credit that traditional lenders require, but they typically have high interest rates.
Most business owners obtain a bridge loan with the intention of refinancing the loan later at better terms.
What is the best hotel loan option?
There is no single best solution for every need. But a hotel loan that is flexible, has a generous maximum loan amount, and a competitive interest rate is everything a borrower could hope for.
Each type of hotel loan caters to specific purposes. But term loans have more flexibility and allow you to use the funds as you see fit.
Many small business owners prefer getting their hotel loans through an online loan provider like Biz2Credit because they specialize in fast funding. Biz2Credit was even named âBest Marketplace Lenderâ by Business News Daily.
Ultimately, the best hotel financing option is the one that will get funds into your business bank account the fastest so you can move forward with your business plans.
What are some common underwriting guidelines that hotel lenders look for?
Underwriting guidelines vary from one lender to another, but there are some commonalities that most lenders utilize.
Some are specific to hotel loans and offer insight into your hotelâs profitability, while others are factors that are common across many types of small business loans.
Some of these metrics include:
- The loan-to-value (LTV) ratio, particularly in commercial real estate loans. The LTV ratio is the amount of the loan divided by the value assigned to the hotel property in an appraisal.
- Your businessâs cash flow, which is the money coming into your business less the amount leaving your business on a daily basis
- The debt service coverage ratio (DSCR), a comparison of your hotel businessâs debt to its cash flow.
- The net operating income of your hotel, which is calculated by adding up incoming revenue and deducting all of your hotelâs operating expenses, as well as its debt payments and other expenditures.
- Your hotelâs revenue per available room. This underwriting metric is specific to motels and hotels and is calculated by dividing the total revenue in a given period by the total number of available rooms.
As with most small business loans, your personal and possibly business credit records will weigh in as will your businessâs annual revenue and the length of time youâve been in business.
Hotel loan takeaways
Owning a hotel comes with enormous expenses, and as such, you will likely need financing more than once as you operate your business.
Hotel financing runs the gamut from funding hotel purchases, renovations, or expansions, construction loans, funds for equipment and furnishings, working capital, and more.
Often these involve large-scale expenses that make it vital to secure a hotel loan. In cases like this, itâs wise to build a rapport with a hotel lender from the onset so you can periodically get the funding you need faster.
Rattan Soni learned the importance of having a hotel lending specialist by his side as he set out to acquire a hotel franchise. He never looked back and knows that anytime he needs hotel funding, Biz2Credit is just a phone call away.
