Owning a hotel is a great way to capture a piece 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 big bills quickly.

Fortunately, you don’t have to finance your entire business out of your own pocket. Hotel loans can provide you with the financing you need to run business operations and take advantage of new opportunities. In this article, we’ll delve into how hotel loans work and how to use them to your advantage.

Types of financing for hospitality businesses

SBA Hotel Loans

The Small Business Administration (SBA) has two solid loan opportunities for hospitality businesses.

The SBA 7(a) loan offers up to $5 million in funds that can be applied to start new hotel businesses, purchase existing hotels, renovate old buildings, construct new buildings, purchase hotel equipment and supplies, and refinance 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 funds that can be applied to purchase or finance land purchases, building construction, construction materials and equipment, and renovation expenses. These acceptable uses are similar to 7(a) with the exception of purchasing inventory, refinancing debt, financing working capital, and investing in rental real estate.

One of the qualification requirements includes an in-depth review of your company’s 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 various areas of your hotel business. They offer between $1,000 and $10 million in financing.

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 agile.

Another good option is a business line of credit. Credit lines are very flexible loans that you can use where your hotel business needs it most. One of their biggest advantages is that they allow you to withdraw 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 work like one and are therefore worth a mention. If you need to cover minor expenses, business credit cards may be a good option. They’re typically easier to approve compared to most loans, and they can also help you earn cash back rewards on items you’ve already paid for.

We’ve compiled the best small business loans into an easy-to-compare list here.

Bridge loans for hotels

Commercial bridging loans provide financing between the time you purchase a hotel and the time you purchase the loans to finance it. It allows you to access cash flow during this gap so you can keep operations running or take advantage of new business opportunities.

In exchange for financing, these loans usually charge high interest rates (which usually range between 8.5% and 10.5%) and must be repaid within a maximum period of 12 months. You will also need to provide the hotel you are buying as collateral. However, these loans are generally approved quickly and can provide much-needed cash flow if you carefully plan your repayment strategy.

For more information on commercial bridging loans, go here.

CMBS Hotel Loans

Commercial mortgage-backed securities (CMBS) loans are a good option for purchasing hotels, renovating existing 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 with $2 million in financing and fixed-rate terms of five to 10 years with amortization periods of 25 to 30 years. One of their biggest advantages is that they do not require excellent credit to qualify. They are also non-recourse loans, which means that lenders cannot take you to court if you do not repay the loan.

That said, they also often come with prepayment penalties and may require you to purchase securities as collateral.

Hard money loans for hotels

Hard money lenders are usually private investors looking for commercial real estate deals. These loans may not require a down payment or good credit, and can be funded quickly. On the other hand, you are likely to give up equity and pay higher interest rates.

For the best hard money hotel loans, head here.

Equipment loan for hotels

Get the funds you need to brighten up 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, the disadvantages include high down payment requirements and strict credit requirements.

Also keep in mind that equipment depreciates, meaning you may be left with old supplies toward the end of your lease. But if you’re looking for a quick way to stock up on essentials without overextending your cash flow, these loans may be just the thing.

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 requirements are often more stringent (a minimum credit score value is almost 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 see your credit score improve, too.

Head here for an in-depth look at the pros and cons of traditional bank loans.

The best loan options for hotels

The best loan for your hotel business depends on where you need more financing. If your most pressing need is to make your hotel presentable, you may be drawn to equipment finance loans to finance furniture. If you’re looking to start construction on a building, SBA loans may be more relevant.

The easiest way to find your best option is to use Navigation. Our platform syncs with your business data to instantly show you the opportunities you’re most likely to qualify for.

With that said, here are some of the best 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 financing increase if you meet the following criteria:

  • Strong credit scores for 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’s review

However, 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 loan programs can generally be applied to one or more of the following categories:

  • working capital
  • Acquire land
  • Construct or acquire hotel buildings (including supplies and materials necessary for construction)
  • Renovation of existing buildings (including supplies and materials necessary for the renovation)
  • Ability to provide financial statements and personal documents for lender’s review

Again, each loan has a unique set of requirements, so be sure to review the details to see if they meet your needs as a hotel owner.

How much do you have to put into a hotel?

While requirements vary depending on how you purchase the hotel, plan to make at least a 20% down payment. Given the substantial cost, this is where hotel loans can come in handy. Options like SBA 7(a) and 504 can provide the startup capital you need to cover a down payment and get your hotel business up and running.

What to consider when getting a hotel loan

With great expense comes great responsibility. Hotel loans can involve borrowing seven or even eight figures in funds, which means interest rate payments can hurt your cash flow if you don’t plan ahead.

Also be aware of warranty requirements. Bridge loans, for example, may require the underlying property to be put up as collateral, meaning that 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 an existing business. Financing can help you build that new mezzanine you’ve been dreaming of or make renovations that increase revenue per available room.

Provided you’ve carefully planned your finances, these loans can be a powerful tool for increasing your net operating income and capturing your share of the lucrative hotel industry.

For the fastest way to find the right loan for your business, use Navigation. Create an account to instantly compare funding opportunities based on your business details.

This article was originally written on May 9, 2022.

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