Hotel Financing Options

Whether you already own a hotel or are thinking about investing in a new hotel, success in the hospitality industry comes with a big price tag. Thankfully, there are a number of hotel financing options that will help to make things more manageable.

How to Finance a Hotel

If you are looking to get started within the hospitality industry or to grow an existing business, acquiring funding through a hotel loan is a great way to do this. Hotel financing allows business owners to get the funding they need to renovate, furnish, purchase, and even build hotels. 

What is a hotel loan?

A hotel loan is any type of financing designed to help hotel business owners access the capital they need to purchase a hotel, expand their enterprise, or refinance an existing hotel.

How does hotel financing work?

A lender or investor supplies you with capital, either as a sum of money or within an asset, like equipment or property, that will help you to grow your hotel business.

Each type of hotel financing will work in a slightly different way depending both on the type of loan and the lender.

Why would I need a hotel loan?

There are a number of different reasons why you may need a hotel loan. This includes:

• building a new hotel
• to cover gaps in working capital
• purchasing an existing hotel
• purchasing equipment, furniture, and fixtures
• renovating an existing hotel

What types of hotel loans are available?

There are a number of hotel loans available to you, depending on your specific needs for funding.

Bank Loans

If you are able to qualify for a traditional bank loan, this is the most affordable type of hotel financing you will find.

These loans can be used for purchasing, building, and refinancing hotels and offer particularly high loan amounts. Interest rates typically fall at 7% or less with repayment terms of up to 25 years.

You are likely to find that this type of loan is hard to qualify for as banks tend to focus on the larger, well-known hotel brands that they can be sure will be able to make repayments on time.

SBA Loans

SBA loans are another type of hotel loan that is highly sought after. These loans are guaranteed by the Small Business Association, for up to 85% of the loan amount, so should you be unable to make your repayments, you are covered. This reduces the risk to lenders and so you are more likely to get approval, assuming you meet the strict qualifying requirements.

Let’s look at the two most popular SBA loans for hotel financing:

SBA 504/CDC Loan Program

If you are looking for a hotel construction loan or a commercial real estate loan, the 504/CDC program will be the most beneficial.

More specifically, this loan program provides funding for:

• buying land
• constructing new buildings
• improving land
• purchasing existing real estate
• purchasing large, long-term equipment
• refinancing debt of a similar nature
• renovating real estate

You will find that the SBA 504/CDC program offers some of the best terms you will be able to find for loans with this purpose. Loan amounts extend up to $20 million with repayment terms of 10, 20, or 25 years.

In order to qualify for this program, you must have a net worth of $15 million or less and an average net income of $5 million or below, after-tax, for the two years prior to your application. The project must also create new jobs, retain existing jobs, or promote a public policy goal.

SBA 7(a) Loan Program

If you are looking for financing that will cover more general expenses, the 7(a) program will be a better option for you, popular among all types of small business owners. This type of SBA loan can be used for business acquisitions, construction, equipment, and operational expenses, among others.

Loan amounts reach up to $5 million and repayment terms will vary depending on what you are using the loan for. For instance, operational expenses come with up to 7-year terms, equipment purchases come with up to 10-year terms, and business acquisitions or commercial real estate purchases come with up to 25-year terms.

In order to qualify for the SBA 7(a) program, you must have a personal credit score of 650 or higher, with an annual business revenue of at least $100,000, and you need to have assets that you are comfortable putting forward as collateral.

Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is an authorized body that purchases or invests in commercial properties using capital either from an individual or from institutional investors. In the hotel industry, REITs will look to obtain a position of equity ownership in the property itself.

As you can imagine, there are both advantages and disadvantages to working with a REIT. One advantage is that it is likely to provide you will access to a group of experts who will be able to give you advice throughout your partnership, which can be especially valuable if you are new to the hotel and hospitality industry. As REITs are long-term investors, it may also mean that you will have immediate access to financial support whenever you need it provided it goes toward the growth of your business.

The main downside to working with a REIT is that you may lose independence when it comes to making decisions, as they typically demand a majority of control when faced with major business decisions.

Business Line of Credit

If you are looking to cover smaller, regular expenses, then you should consider a business line of credit. A business line of credit provides you with a borrowed sum that you are able to draw from whenever you need to, only paying interest on the amount you actually use.

Once you pay back any funds you have used, you can use that money over and over again for as long as the credit line is open. You will be able to find both short- and long-term repayment options with rates varying accordingly.

Credit amounts range from around $10,000 up to $1 million with terms ranging from as little as 6 months up to 5 years.

To obtain a business line of credit, you will typically be required to have a credit score of at least 630, annual revenue of $180,000 or more, and have been in business for at least 1 year.

Hotel Bridge Loans

If you need financing quickly, a hotel bridge loan can provide you with short-term financing until you receive longer-term funding from a better financing option, like those mentioned above.

A hotel bridge loan is taken on knowing that it will need to be refinanced by a more affordable hotel loan soon after.

Loan amounts range anywhere from $1 million reaching upwards of $40 million with loan terms of 6 months to 3 years and interest rates up to 9.25%.

Equipment Financing

If you are looking for funding simply to purchase new equipment for your hotel, you should consider equipment financing. An equipment financing company will supply you with up to 100% of the total cost of equipment to make your purchase which you then pay back over an agreed period of time with interest.

The benefit of equipment financing is that the equipment itself functions as collateral so, if you default on your repayments for any reason, the equipment financing company will simply seize the purchased equipment and liquidate it to get their money back.

You will typically need a credit score of at least 630, annual revenue of $130,000 or more, and at least 2 years in business. That being said, due to the collateral element, you may be able to secure this type of funding even if you don’t meet these requirements.

What are the pros and cons of hotel loans?

Pros

• opportunity for business growth
• provides the capital you need to keep up with the competition
• opportunity for property expansion
• enables you to renovate and update properties

Cons

• can be expensive if you don’t have strong business credentials and finances
• may lose creative control if you partner with investors
• may have to put valuable assets on the line

What lenders offer hotel loans?

There are a number of lenders that offer hotel loans, including banks, online lenders, and private investors.

You are likely to find that banks will favor hotels of high quality in key locations so you may not be able to secure a bank loan if you are a smaller franchise or independent hotel. You may also find it difficult to afford the initial costs of a bank loan as they generally require hotel loan borrowers to put down a deposit of 20-50% of the loan.

If you are a smaller or independent hotel owner, your best option is to look towards online, alternative lenders, depending on your need for financing.

How to Apply for Hotel Loans and Financing

The way in which you need to apply for a hotel loan will depend largely on the type of loan and the lender or investor. With that being said, you can expect the best hotel financing options to require:

• a credit score of at least 680
• time in business of 2 years or more
• a down payment of 10% or more
• a positive credit history – no tax liens, foreclosures, or recent bankruptcies

Lenders will also consider:

• cash flow
• Debt Service Coverage Ratio (DSCR)
• Loan-to-Value (LTV) Ratio
• Net Operating Income (NOI)
• revenue per available room
• debt yield
• branding

No matter why you need hotel financing, there are plenty of great funding options available to you. If you are to obtain a hotel loan, PrimeRates can help you to shop around and compare lenders all in one place. Our application will only take you a couple of minutes to complete and from there you will be able to compare loan amounts, APRs, and monthly payments to choose the loan offer that best suits you and your business. Click here to get started.