Owning a hotel is a great way to capture a chunk of the $1 trillion global hotel industry. But starting a hotel business can also be extremely expensive. Whether you’re building a new location, paying employee salaries, or renovating existing buildings to increase occupancy, hotel properties can rack up large bills quickly.
Thankfully, you don’t have to fund your entire business out of your own pocket. Hotel loans can provide the financing you need to run business operations and jump on new opportunities. In this article, we’ll dive into how hotel loans work and how to use them to your advantage.
Types of Funding for Hospitality Businesses
SBA Hotel Loans
The Small Business Administration (SBA) has two solid loan opportunities for hotel businesses.
The SBA 7(a) loan offers up to $5 million in funding that can be applied to starting new hotel businesses, buying existing hotels, renovating old buildings, constructing new buildings, buying hotel equipment and supplies, and refinancing existing debt.
Requirements include acceptable credit scores and insurance coverage, and loan terms range from 10 to 25 years. Nav covers everything you need to know about the 7(a) loan here.
The SBA 504 loan offers up to $5.5 million in funding that can be applied to buying or financing land purchases, building construction, construction materials and equipment, and renovation expenses. These acceptable uses are similar to the 7(a) with the exception of buying inventory, refinancing debt, funding working capital, and investing in rental real estate.
One of the requirements for qualification includes an in-depth review of your business’ financial statements. Nav covers everything you need to know about the 504 loan here.
Small Business Hotel Loans
Small business loans are flexible capital loans that can be applied to several areas of your hotel business. They offer anywhere between $1,000 to $10 million in funding.
If you’re looking for a way to cover operating expenses like salaries, rent, or utilities, explore working capital loans. These loans can help reduce the stress of daily operations and keep your cash flow nimble.
Another good option is a business line of credit. Lines of credit are highly flexible loans you can use wherever your hotel business needs it the most. One of their biggest advantages is that they allow you to draw as much or as little capital as you want, while only paying interest on what you use.
While business credit cards aren’t technically loans, they can operate like one and thus deserve a mention. If you need to cover smaller expenses, business credit cards can be a good option. They’re generally easier to get approved for compared to most loans, and can also help you earn cash back rewards on items you already pay for.
We’ve compiled the best small business loans into an easy-to-compare list here.
Hotel Bridge Loans
Commercial bridge loans provide funding between the time you acquire a hotel and the time you acquire the loans to finance it. It lets you access cash flow during this gap so you can keep operations running or seize new business opportunities.
In exchange for financing, these loans typically charge high interest rates (often ranging from 8.5% to 10.5%) and must be repaid in 12 months at the latest. You’ll also need to provide the hotel you’re buying as collateral. However, these loans are usually approved quickly and can provide much-needed cash flow if you plan your repayment strategy carefully.
For more on commercial bridge loans, head here.
CMBS Hotel Loans
Commercial mortgage-backed securities (CMBS) loans are a good option for buying hotels, remodeling current buildings, or refinancing existing loans. They involve packaging your mortgage into bonds after you successfully purchase a new property. These bonds are then sold to investors.
CMBS loans typically start at $2 million in funding and five to 10 year fixed-rate terms with 25 to 30 year amortization periods. One of their biggest advantages is that they don’t require excellent credit to qualify. They’re also nonrecourse loans, meaning lenders can’t take you to court if you fail to repay the loan.
That said, they also often come with prepayment penalties, and may require you to purchase securities as collateral.
Hard Money Hotel Loans
Hard money lenders are usually private investors looking for commercial real estate deals. These loans may not require down payment or good credit, and can be funded quickly. On the flip side, you’ll likely give up equity and pay higher interest rates.
For the best hard money loans for hotels, head here.
Equipment Loans for Hotels
Get the funds you need to brighten your hotel with furniture, lighting, fixtures, and other must-haves. Equipment financing loans can offer borrowers low APRs and predictable monthly payments. On the other hand, downsides include high down payment requirements and strict credit requirements.
Also keep in mind that equipment depreciates, which means you may be stuck with old supplies towards the end of your lease. But if you’re looking for a quick way to stock up on essentials without dipping too far into your cash flow, these loans can do the trick.
Read everything you need to know about equipment financing here.
Bank Loans for Hotels
Finally, you can also explore a traditional bank loan for your independent hotel business. While the requirements are often stricter (a minimum credit score value is all but guaranteed) and approval times are longer, you’re also more likely to pay lower interest rates and enjoy predictable monthly payments.
Make your loan payments on time and you’ll also see your credit score improve.
Head here for an in-depth look at the pros and cons of traditional bank loans.
The Best Hotel Loan Options
The best loan for your hotel business depends on where you need financing the most. If your most pressing need is to make your hotel presentable, you might be drawn towards equipment financing loans to finance furniture. If you’re looking to start construction on a building, the SBA loans might be more relevant.
The easiest way to find your best option is to use Nav. Our platform syncs with your business data to instantly show you the opportunities you’re most likely to qualify for.
That said, here are a few of the best all-around hotel loan programs on the market.
Equipment Leasing by American Capital Financial
How to Qualify for a Hotel Loan
In general, your chances of getting funding increase if you have the following criteria:
- Strong credit scores for both business and personal credit profiles
- Ability to post collateral
- Reliable current cash flow
- Strong projected future cash flow
- Ability to provide financial statements and personal documents for lender review
Nevertheless, there are many types of hotel loans, and each hotel lender has a unique set of requirements. For example, you may not need excellent credit to qualify for a hard money loan. Review the details of specific loans to see if you have the necessary qualifications.
Ways to Use A Hotel Loan
Funds from hotel lending programs can generally be applied to one or several of the following categories:
- Working capital
- Acquiring land
- Building or acquiring hotel buildings (including supplies and materials necessary for construction)
- Renovating existing buildings (including supplies and materials necessary for renovation)
- Ability to provide financial statements and personal documents for lender review
Again, each loan has a unique set of requirements, so be sure to review the details to see if they satisfy your needs as a hotel owner.
How Much Do You Have to Put Down On A Hotel?
While the requirements vary depending on how you’re making the hotel purchase, plan to make at least a 20% down payment. Given the substantial cost, this is where hotel loans can come in handy. Options like the SBA 7(a) and 504 can provide the upfront capital you need to cover a down payment and kickstart your hotel business.
What to Consider When Getting A Hotel Loan
With great expenses comes great responsibility. Hotel loans can involve borrowing seven or even eight figures in funds, which means the interest rate payments can damage your cash flow if you don’t plan ahead.
Also be mindful of collateral requirements. Bridge loans, for example, may require putting up the underlying property as collateral, which means defaulting on the loan could have unintended consequences.
With those factors in mind, hotel loans can also provide exactly what business owners need to start a highly profitable hotel business or increase the profitability of a current business. Funding can help you build that new mezzanine you’ve been dreaming of or make renovations that increase the revenue per available room.
As long as you’ve mapped out your finances carefully, these loans can be a powerful tool to boost your net operating income and capture your share of the lucrative hospitality industry.
For the fastest way to find the right loan for your business, use Nav. Create an account to instantly compare funding opportunities based on your business data.
This article was originally written on May 9, 2022 and updated on May 10, 2022.
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