Understanding the Hotel Loan Market: Do Your Research

In many regards, getting a motel or hotel loan is like obtaining other sorts of business financing. Anyhow, it is potentially tricky to run a hotel, so it takes much training and experience to do this. Many individuals run smaller motels or hotels for their satisfaction to a greater degree than financial rewards. As far as they are concerned, it is a family business or a part of their retirement plans. In the above-mentioned cases, several owners deal in one facility, like a single motel or hotel.

The hospitality segment may be flourishing, but as a potential borrower, you must follow certain basic measures to be ready for obtaining a hotel business loan. Three of these basic steps are creating your business plan, as well as performing a market study and competitor analysis. Loan terms and loans are available to you to use at your discretion. Besides, being prepared is likely to affect loan approval, terms, and rates in a way that proves favorable to you.

It is a must to make the proper choices and get the financing on the appropriate terms; you being a small business operator cannot make any error here. It takes much preparation from you to secure this form of business loan. When seeking it, you must consider real estate acquisition, insurance, staffing, marketing, and licensing. All of the above can be the factors at play in deciding whether or not you will get the funding.

Market Research and Hotel Location

The location is among the main factors to think about when either seeking to finance an establishment that is already in operation or researching your motel/hotel acquisition. More specifically, your motel or hotel’s location will help to decide which customer segment(s) to target. Should you buy an establishment in a big city, you would possibly attract both tourists and business clients. If you purchase a remote property situated near to the mountains or beach, you may draw in family vacationers; this is quite a simple concept. Anyhow, staffing, and marketing implications are likely to be altogether different.

Industry experts recommend having a broader viewpoint when considering the location, to recognize the dynamics of the market. The things to contemplate when researching sightseeing/tourist venue locations include how close these locations are to main tourist attractions and how accessible these are. For a business-oriented location, you would like to consider regional travel patterns, plus proximity to transportation hubs and convention centers, and maybe even whether there is a meeting room at your property.

It is perhaps slightly easier to do your research than you might imagine. Visiting main travel search websites can now aid you in identifying how some locations and properties are performing in your potential target market.

Create Versus Purchase: Utilizing Your Hotel Funding Wisely

Several potential hotel business owners will seek to purchase an existing space instead of creating a facility from scratch. It will be a logical choice in many situations. Anyhow, remember that it might just be better to utilize a hotel business loan to build as opposed to purchasing an existing real estate space. Do you have this kind of project in mind? If yes, obtaining funding for that hotel business through the SBA or a local CDC’s 504 Loan scheme is perhaps the best option for it. We will talk about financing products in detail below.

Can you recognize growing-population areas that have an inadequate number of lodging facilities, as well as greater rates of occupancy than the regional or national averages? If yes, it is perhaps a good idea to construct a hotel in one of those areas. An alternative move to the above is the purchase of an already established facility, which you can expand and/or make modern. When considering buying the facility, the right choice may be an SBA 504 loan specialized for hotel businesses.

When it comes to vacation destination hotels, remember that stay lengths keep increasing, so the business owners should contemplate what the extended stays mean to their guests. The above situation may result in a requirement for a room with facilities like Wi-Fi and computers, as well as laundry facilities. Expecting and serving your guests’ requirements is an absolute must to set this kind of hotel business up for success.

Including some amenities in an existing establishment, is perhaps a cost-effective move that lets you increase room prices. A gymnasium, outdoor or indoor swimming pool, hot tubs, outdoor decks, saunas, and courtesy vehicles are the facilities that can attract visitors. Besides, these amenities are likely to offer your hotel business a competitive edge. Remember that including facilities in it entails maintenance costs, besides the initial expenses. Therefore, you will also have to set up funding useable for the aforementioned recurring costs.

Panning your hotel facilities and offerings in a careful way, and reviewing your operations-related costs, can aid you in creating the business plan precisely and efficiently. A strong business plan can help to clearly understand not only your hotel funding needs but also your continuing operational P&L profile. To get the loan, it is a must to prove that you have the capability to pay it back with your business revenue.

Forms Of Hotel Loans

The loans are useable for numerous causes. Firstly, you can use these to purchase land/a hotel that is in operation or build a hotel. Are you seeking to renovate the hotel that you already own? If yes, you may use the loan amount to finance its renovation, buy equipment or cover many different short-term/long-term expenses.

Conventional banks and hotel lending institutions often favor hotels of higher quality in prime places. This favorable treatment causes independent and smaller facilities to struggle to get the funding they need. Besides, banks usually necessitate borrowers to put 20 to 50% down on a hotel real estate loan. These lofty down payment costs can keep a smaller hospitality entity from getting the funds they require to develop their business.

Independent hotels may find it harder to secure funding than the branded hotels having a proven and transparent business for lending institutions to check. This is like other forms of businesses, especially in the case of franchise ownership. Next, we will look at the best-known forms of hotel business loans.

Conventional Bank Loans

Banks are the primary sources of hotel loans even today, and these institutions lead in the case of almost all business loan categories. Even so, bank financing for hotel businesses is concentrated very much on branded and bigger properties. As discussed earlier, it is trickier to obtain funds for smaller lodging real estate from a conventional bank.

SBA Loans

The SBA is not lending funds directly to these customers. Rather, the SBA works with select lending institutions to offer partially guaranteed loans to America’s small businesses. The organization guarantees a percentage of the business loans of SBA-approved lending institutions, given the possibility of borrower defaults. The risk profile for banks is lower with regard to SBA loans, and the institutions will aggressively push these forms of products.

SBA’s loan scheme mandates the maximum rate of interest, as well as payback thresholds which are lower as compared to what conventional lenders offer. Besides, an SBA-guaranteed loan tends to require making a down payment that is smaller than conventional hotel loans. Some SBA loan schemes such as the one called ‘7A’, allow borrowers to access maximum loan amounts of $5,500,000 to finance their hotel purchase or project.

In the event of qualifying, you may find an SBA hotel loan a very good option. Even so, it is tricky to qualify for hospitality business funding. The loan comes with not just high credit criteria for applicants but also more paperwork. This will also result in loan determination taking more time than usual. You may expect the overall loan processing to take as many as 90 days.

SBA 504 Loan: It is perhaps an option for a bigger hotel business project that involves the building expansion or the acquisition of real estate. The loan scheme will have the involvement of a locally certified development company to provide funding for development.

The loan is structured in a way to possibly give you 40% of your overall project costs from the SBA and 50% of these from an SBA-authorized funder. This means you will possibly have to contribute just 10% of these costs. That said, in some situations, you may have to contribute as much as 20% of these.

Property Investment Pools and Trusts

The word ‘REIT’ refers to an entity that either puts money into or purchases real estate, with funds from institutional or independent investors. In several situations, the entity will look to purchase equity in a hotel business’s real estate. There are many advantages to this form of financing. With a hospitality REIT partnering in your business, you will have experts to guide you through the process of decision making. Besides, REITs make long-term investments, may offer continual support, and maybe an extra capital source.

A different advantage of partnering with them is the possibility for future business opportunities that the move creates. RIETs always expand, and they demand competent managers. In the event of being successful in a venture, you may be tipped to grow as your investor group grows.

A downside of entering the said partnership is that it possibly means you losing the freedom to make decisions on your own. The entity will generally insist on keeping much influence over big business calls.

Hybrid Hotel Financing Approach

Do you want to be a small hotel owner? If yes, your property is unlikely to be eligible for a combination of the aforementioned financing programs/schemes. This is true for more than 80% of those small entity owners who look for loans. Even though you fail to be eligible for SBA’s loan, conventional bank, or alternative lender loan, you may get smaller funds from every one of these institutions.

For instance, you may approach a bank for a mortgage to fund your small lodging business that offers overnight accommodation in 10 rooms and breakfast. Alternatively, you may utilize a credit line to buy supplies such as furniture, linens, and beds for that 10-room B&B business. A case manager can aid you in receiving a consolidated business loan or realizing the hybrid way to get the hotel funds you require.

Tips To Keep In Mind

Produce Proof Of Business Profitability: Are you applying to an American lender for a hotel loan? When you are, you must demonstrate to that lending institution that your future business model is potentially lucrative and sustainable. This is particularly important, if you do not know a lot regarding the US hotel or if this business will become a nationally-known brand.

Have A Hotel Marketing Plan: If lending institutions already know a branded hotel, the business may have a funding-related advantage over an independent one. On the flip side, independent hotels have that anonymous factor, so lending institutions would like to know much more regarding their marketing plan. In short, the lenders will wish to be extra sure that the hotel rooms will become full.