Hotel and Motel Financing: Why Now is a Favorable Time to Act
March 17, 2020
March 17, 2020
When they’re operated in the right ways and places, hotels can be lucrative investments for a smart small business owner, and finding the right options for hotel financing is one of the most important steps in the entire process. The right hotel loan or loans will grant you the capital required to purchase, renovate, or operate a hotel, and with repayment options that allow for sufficient cash flow into the future.
There are numerous ways for a savvy entrepreneur to buy their way into the hospitality industry, if they’re not already involved. Firstly, you could purchase a successful existing independent hotel. You could also buy into a franchise – the big name hotels and motels we’re all familiar with like Hilton or Marriott. Or you could buy an older hotel and perform the sorts of renovations that will bring success.
Regardless of how you acquire your hotel, there are a few considerations that will remain in place across the spectrum.
The success of your hotel is highly dependent on its location. In most situations, people will stop at a hotel for one of four reasons: it’s a convenient place to stop during travel, it’s near a popular tourist destination, it’s a destination unto itself, or some combination of the three. The first two reasons are entirely dependent on location. A well-run and wisely-operated boutique hotel located far from major thoroughfares can’t overcome its lack of traffic.
So evaluate your prospective hotel’s location. Is it in an urban, population-dense area? If it’s in a more rural area, is it close enough to a major highway or airport to attract enough guests?
Historical revenue data is important in any business acquisition, but can be particularly vital in hotels. When you get a chance to examine your future hotel’s balance sheet, you’ll get an instant snapshot of busy seasons and slow seasons, trends from year to year, and an understanding of when you’d need to tighten the belt to maintain sufficient cashflow.
Think about the future of this hotel – one year, five years, fifteen years into the future. Is it located near a major interstate that will always be filled weary travelers? Is it near a tourist destination like a college football stadium or historical landmark? If it isn’t, ask yourself whether that hotel is enough of a destination on its own to merit guests.
Once you’ve set your sights on the real estate in the right location, you’ll need to acquire sufficient capital to buy a hotel. There are several major hotel lending options.
If you’ve got great credit and an existing relationship with a lender, a conventional bank loan might be your primary financing option when it comes to a hotel loan.
A traditional loan comes with some serious advantages to lenders eligible for them. For starters, because they’re not coming from the United States government, there tend to be fewer strings attached: you’ll be able to use the loan amount you receive on real estate, construction financing for expansion, renovation, new construction, or any number of hotel projects. You could use that money on everyday operational costs, payroll, marketing, anything your hotel business could need.
On the other hand, conventional loans can be difficult to acquire. You’ll need a fantastic credit score and sufficient evidence of your ability to repay. Remember, a loan is essentially an endorsement of your business. Banks underwrite loans because they see the lender as very likely to repay that loan at the given interest rate. So lenders won’t dole out a six- or seven-figure hotel loan unless they’re sure you’ll be able to repay.
An SBA 7(a) loan is very similar to a conventional bank loan. You’ll receive a set amount of capital (up to $5 million) and will be given a set timeframe for repayment. In addition, SBA loans will come with a lower interest rate than most conventional loans. Excellent. So why doesn’t every hotel owner go for an SBA 7(a) loan?
SBA loans are backed by the United States Small Business Administration. The government guarantees a large percentage (75% or 85% for 7(a) loans) of the loan against default, greatly reducing risk for the lender. Because they’re guaranteed by taxpayer dollars, SBA loans feature stringent criteria for borrowers, including specific loan terms.
While 7(a) loans are the most common type of SBA loans, they’re not the only product available.
SBA 504 loans are significantly more complicated than 7(a) business loans, but are very attractive for many hoteliers looking for cash. In a SBA 504 loan, two hotel loans are combined to create a new long-term, low-interest package. One of those loans will come from a traditional hotel lender like a bank, while the other will come from a qualifying Certified Development Companies, or CDCs. The SBA will cover a certain percentage, a non-profit CDC will cover a certain percentage, and the borrower will chip in as well.
SBA 504 loans come with additional requirements. They can’t be used for working capital like a traditional loan or SBA 7(a) loan. They must be used for purchasing commercial real estate, buying new machinery, modernizing historical property, or other similar purchases.
The United States Department of Agriculture also offers a loan program that’ll allow buying a new hotel. Like all government-backed loans, these USDA B&I loans come with particular criteria. Your hotel will need to be located in a qualifying rural area. You’ll need to show that it’ll create jobs, and will need to invest in environmental improvement initiatives. Of course, you’ll need pristine credit as well.
If you’ve opted for a hotel acquisition and are looking into bringing an older, less-expensive hotel property into the modern era, there are several ways of finding loans for that specific purpose. Hotel construction or renovation can be particularly expensive… or, if you’re experienced and smart about where you’re spending your money, can yield massive rewards on smaller business loans.
Firstly, depending on the scope of the renovations, you may need a smaller loan than a borrower looking to purchase a relatively-new and already-profitable piece of real estate. A smaller budget means more opportunities for lending.
If your existing hotel needs a large and expensive new piece of equipment, an equipment loan would allow you to make that purchase at a favorable interest rate.
In addition, you could consider a business line of credit or credit card. These options will allow you to borrow only as much as you need, when you need it, meaning that you’ll only pay interest on what you spend. It’s very helpful for keeping debt service at a minimum.
Finally, if your new hotel is significantly old, you may want to consider using the United States National Parks Service to acquire significant tax credits in order to fund renovations and restorations. If your hotel qualifies, you could earn as much as 20% of your expenses back as a tax credit.