With the right location and a robust business plan, a hotel can be a very potent revenue stream, but if you have bad credit, then you might assume that the initial costs are out of reach. However, several financing options are available to you no matter how low your credit score. If you’re considering buying a hotel, but you’re concerned about getting the right funding, then these options could be the key to your entrepreneurial ambitions.
Bad Credit Check
Your first step should be to get a credit report. It could be that your credit history isn’t as bad as you suspect. Many people assume that factors like student loans will play a large part in a credit assessment, and although repayments on existing debts can play a role in your credit score, they may not be the barrier that you think. Before you start looking at alternative options to traditional commercial loans or an interest-only business loan plan, check your credit history. There are 3 main credit bureaus: Equifax, Experian, and TransUnion. You are legally entitled to one free credit report each year.
Bad credit is typically characterized as a FICO score less than 579. Here’s the breakdown:
- 300 – 579: Very Poor Credit
- 580 – 669: Fair Credit
- 670 – 739: Good Credit
- 740 – 799: Very Good Credit
- 800 – 850: Exceptional Credit
Regardless of where you are in your real estate search, if you have bad credit, you’re definitely going to want to work on improving it. One relatively easy way to do this is:
- Apply now for a secured credit card (a credit card where your own cash acts as security)
- Commit to making your monthly payments
- Keep making your monthly payments
It will take time to boost your credit rating, but the sooner you start, the sooner you’ll be in good shape to access bank loans and other, harder to obtain, hotel financing.
Before Applying for Financial Help
After you’ve figured out what’s going on with your credit score, you’ll need to develop a thorough business plan — especially if you don’t have particularly good credit. Making a solid business plan will give you a clear idea of your expected expenses, and give financial institutions a reason to take you seriously as a borrower.
- You may have to factor in:
- The cost of the hotel property
- Your down payment
- Any relevant equipment financing
- Ongoing expenses (staff wages, property maintenance)
- Marketing costs
- Insurance requirements
- Alcohol license, food safety classes, and entertainment permits
Financial Options with Bad Credit
Once you know how much money you need borrow, you will have several options to consider. Make sure that you know how much your future payments are going to affect your business profits, and never borrow more than you can expect to pay back. When you have bad credit, the number of options available to you are reduced, so knowing all of your funding options becomes even more crucial.
- Unsecured Business Loans: While these used to be the sole domain of banks, there are more modern ways to source an unsecured business loan. These are loans that do not rely on using your assets or your property as a guarantee. They can move quickly from application process to getting money into your bank account because they don’t need to do conveyancing or property valuation. Unsecured business loans are usually flexible, but they will rely on your ability to offer a personal guarantee. What that means is that you promise to pay back the loan amount even if your hotel fails. It’s not the best option for every hotelier (or every hotel property), and the interest rates can be very high. However, they are customizable, meaning that you can have a lot of control over how much you pay back over your preferred period of time.
- Asset Financing: If you have already acquired hotel equipment and machinery, then you may be applicable for asset financing. If you paid for that equipment out of your own pocket rather than through equipment financing, then you can use your new assets as the security for your loan. The fact that you have an asset acting as security for your loan means that you will pay less in interest rates.
- Merchant Cash Advance: This can be a beneficial option for those in the hotel industry. That’s because you will be accepting a large number of your payments via credit cards and debit cards. A merchant cash advance works by allowing you to make your payments solely through the money that you make through those card receipts. You will pay a percentage of each amount every month, week, or day, meaning that the busier you are, the quicker you’ll be able to pay off your initial cash advance. It’s one of the options that is renowned for high acceptance rates, although your credit rating will affect how much of a percentage you will pay on each payment that you receive from hotel guests, and how often you pay it.
- Invoice Financing: This will only be suitable if you have been in business for a while (so, not new entrepreneurs). If your hotel plans are an extension of an existing hotel portfolio, then you may be applicable for invoice financing. Hotels invariably have limited access to their profits due to a growing collection of unpaid invoices, and invoice financing uses those to guarantee the return of any money that they lend. The lender takes a set percentage of any invoice that is paid. Invoice financing can be a great way to have better control over your cash flow and maintain a greater ongoing level of working capital.