Popular Hotel Financing Options
Starting and running a hotel or motel requires big bucks. Hotel owners need to have a substantial cash flow to be able to pay salaries to employees, maintain the properties, renovate the existing buildings to increase occupancy, etc. In the case of motels or small hotels, which are usually run by single facility purveyors(who own just a single hotel/motel), though the operating costs are considerably low, the owners require to invest, periodically, in repairs, incorporation of the latest features, etc. to survive in the highly-competitive business environment. Hence, business loans often turn out to be a savior for those facing momentary cash flow issues and looking for funds to continue operating, pay for necessary facelifts, or simply expand. However, to prepare for a hotel loan application, the owner must follow some basic steps. A thorough market research needs to be conducted and an elaborate business plan, backed with statistics, needs to be made. Also, the staffing, insurance, and licensing details, income statements, and detailed marketing plans need to be presented to the lenders to prove the creditworthiness of a business. As loan terms are often facultative, making the basic pre-application preparations always help a loan seeker to get access to the desired amount with the most convenient terms and low rates. A hotel or motel owner must secure a loan on the right terms to eliminate the possibility of various payment-related issues and other inconveniences.
The U.S. hotel industry is colossal. The luxury hotel industry of the U.S. is forecasted to grow at a CAGR of at least 9% from 2021 to 2026 and is considered one of the most flourishing sectors due to the constantly-increasing number of international sports events, exhibitions, and trade fairs taking place in different parts of the country (source: mordorintelligence.com). Therefore, many entrepreneurs attempt to enter the industry with monetary support from hotel financing, which is often used to purchase a property, renovate the existing one and keep it up to standards, open a branch in a new location, etc. There are multiple business loans available to finance a hotel or motel venture.
7 Popular financing options for hotels and motels:
SBA hotel loans
These are loans guaranteed by the U.S. Small Business Administration. The SBA 7(a) loan offers funds of up to $5 million that can be used to construct new hotel buildings, buy existing ones, renovate and restore old properties, and purchase hotel equipment and supplies. Also, it can be used to refinance existing debts. The term, in the case of SBA 7(a), ranges from 10 to 25 years.
SBA 504 loan provides up to $5.5 million, which can be used for financing land, construction material and equipment purchases, building fabrication, and renovation.
Commercial real estate(CRE) loans
These come with a term ranging from 1 year to 25 years and an interest rate of around 5% with banks and SBA, and 30% with hard money lenders. In the case of CRE loans, the lender evaluates the loan application based on the credit score, the real estate collateral value, and the time the applicant has been in business. A bank requires a credit score of at least 700, whereas a hard cash lender or an online lender accepts applications from loan-seekers with a 660 score.
Hotel bridge loans
These loans help entrepreneurs operate smoothly or seize favorable business opportunities during the gap that is created after they have acquired a hotel but have yet to secure affordable, long-term loans to finance the same. Hotel bridge loans are generally short-term loans with high-interest rates. Also, the borrower needs to put up the hotel he/she has acquired, as collateral. However, the approvals are given quite fast. Hence, hotel owners often opt for this type of loan to refinance it later with low-interest loans at better terms.
CMBS(Commercial mortgage-backed securities) Loans
These loans are selected by those looking to purchase hotels, refurbish old ones, or refinance ongoing loans. In the case of CMBS, after the borrower successfully purchases a new property, his/her mortgage is turned into bonds, which are sold to the investors. Starting at $2 million, these loans come with fixed-rate terms, which range from 5 to 10 years, and 25 to 30-year amortization periods. These are non-recourse loans, which means the lenders do not have the authority to drag the borrowers to court, in the case of defaults. Hence, these often come with prepayment penalties and might require borrowers to purchase securities as collateral. However, one doesn’t need to have an exceptionally high credit score to qualify for this type of loan.
Traditional bank loans
Though these loans come with low-interest rates, eligibility criteria are often high. The application and approval processes are quite lengthy. Hence, those looking for loans with the lowest possible interest rates, often find bank loans ideal.
Business Line of Credit
Similar to a credit card, a business line of credit offers funds as well as the flexibility to decide how much to use now and how much to keep reserved for future use. The lender grants the borrower access to a revolving line of credit for a certain amount of money. Interest is applied only to the withdrawn amount and not to the entire approved amount. One can repay the used amount and withdraw the same or a bigger amount immediately or whenever needed. A business line of credit can range from $5,000 to $1 million and is often considered a quick and flexible financing option for hotels and motels. The repayment term ranges between six months and five years.
Merchant Cash Advance(MCA)
These are advances in return for a percentage of the borrowers’ future revenue. An MCA lender pays an up-front lump sum to a hotel owner and buys a percentage of the hotel’s future sales. The lender typically redeems the percentage of sales that it has bought through an automated approach, a daily ACH(Automated Clearing House) deduction directly from a bank account. The cost of a merchant cash advance is typically presented as a factor, which is a fixed percentage of the amount advanced. This is added to the amount that the hotel owner needs to pay back to the MCA lender. These are ideal for those looking for quick funds as the approvals are given within a few hours of the application and funds are transferred within 24 to 48 hrs. of the approval. Hence, these are termed ‘same-day loans’. Also, MCA lenders are quite lenient in terms of credit score requirements. They consider the cash inflow of a business and its income statements of the last 6 months to 1 year to evaluate the creditworthiness of the applicant. Also, an MCA application requires less documentation and no collateral. The usage of the borrowed funds is not restricted by the MCA lenders.