If you’re looking to buy a hotel, there are several financing options available. Each one has its own interest rates, credit requirements, and repayment periods.
Bank loans and SBA loans are both popular choices for independent hotels. Both offer competitive financing and long repayment terms, but they require more rigorous underwriting processes and longer wait times.
1. Bank Loans
Buying an existing hotel or building one from the ground up can be a complicated process. Figuring out what equipment you need, staffing and supplies – and ensuring all of this is within budget – can be quite stressful.
Lenders look at your net operating income (NOI), revenue per available room (RevPAR) and cap rate to help them determine how much you can afford to borrow on your hotel purchase.
Independent hotels often find it more difficult to get financing compared to brand name properties, due to a lack of proof that their business model is sustainable and successful.
Getting the right funding for your hotel project is critical to its success. Fortunately, there are lenders that specialize in lodging and hospitality that offer specialized loans that meet your needs.
2. SBA Loans
Whether you’re looking to buy an existing hotel, renovate or build a new one, SBA loans are a great way to secure funding for your project. These are the most widely available form of business financing and are backed by the Small Business Administration, which means that lenders are less likely to lose money on your loan.
To get an SBA loan, you must meet certain criteria. These include being independently owned and operated, not dominant in your field and meeting employment or sales standards developed by the SBA.
If you’re looking to build a new hotel or renovate an existing one, the SBA offers both a loan and a 504 loan program. Both offer hotel financing to help you build, acquire or refinance your project at an 85% to 90% loan-to-value rate.
3. Working Capital Loans
A working capital loan is a common option for hotel owners that want to fund a purchase, renovation or construction project. These loans can be secured from a variety of sources, including banks and alternative lenders.
Lenders use a number of metrics to assess whether you can meet your loan repayments. One of the most important is a DSCR, which compares your annual net operating income to the amount you could be expected to pay back.
Other criteria lenders use include business experience and the performance of your hotel. They also want to see a trading history and occupancy rates so they can be sure the investment will succeed.
4. Lines of Credit
If you’re looking to open a hotel, you’ll need financing to cover the costs. This includes buying or leasing real estate, renovating, hiring staff, purchasing equipment, and a host of other things that make your hotel run smoothly.
Unlike a traditional loan, business lines of credit let you access funds when you need them without paying interest as long as you meet your repayment obligations. This makes them ideal for unexpected expenses or ongoing projects that have variable costs and timelines.
Lines of credit can also be useful for smoothing out cash flow during slow seasons, short work shortages, or other temporary issues that many small businesses face. However, you should be aware of withdrawal and maintenance fees that can add up over time.
5. Crowdfunding
Whether you are an established hotel or a brand new start up, crowdfunding can be a great way to finance your purchase. It’s a way to raise the money you need in small amounts from people around the world who are willing to invest.
It can help you get the financing you need for your hotel without having to pay high interest rates or fees and is becoming increasingly popular. Crowdfunding works by presenting your business plan and asking supporters to provide a donation or investment.
The key is to promote your campaign well and keep it active. This means regularly updating your campaign page so that people can see how far you’ve come with your fundraising efforts.
