Every day, somewhere in the world, someone is either buying or selling a hotel. And every time a hotel business changes hands, these two activities happen together.
So many factors go into getting your start in the hotel industry. Choosing the right hotel (if you don’t plan to build your own), hiring an expert team, offering attractive amenities – and, of course, finding the financing you need to get started in the hotel industry.
There are many different financing options available to aspiring hotel owners today. The key is to pick the right loan product for your budget, needs and goals.
Small Business Administration (SBA) loans aim to make entrepreneurship accessible and affordable for individuals as well as entities. What is important to know here is that the SBA isn’t actually the lender, but rather the guarantor.
A number of different SBA loan products exist to meet the needs of different entrepreneurs, depending on where your hotel is located (city or rural), whether it is a new build or existing structure, what stage the business is in (start-up versus cash cow) and what you need the funds for (acquisition, renovation, assets purchase, et al).
Conventional loans are typically offered through a bank, online lender or credit union. These types of loan products tend to be the most difficult to qualify for, since the lender assumes full risk (unlike with SBA loans, where the SBA steps in to guarantee repayment of the loan to each participating lender should you default).
However, for some situations, applying for a conventional loan can make sense, especially if you have excellent credit and plan to bank with that institution for all your other needs as well.
If you are in negotiations to purchase an existing hotel, some sellers will offer what is called “seller financing,” which means they extend you a loan or line of credit to purchase the hotel from them.
With this type of financing, everything is up for negotiation between you and the seller, including the loan terms and the interest rate.
A newer loan option that is gaining ground with entrepreneurs is alternative lending. Here, the loan may be crowd-funded by a diverse group of individual investors who essentially pool their investments to fund your loan.
With asset-based lending, you use your existing assets as collateral to obtain a hotel loan.
Tips for Overcoming Hotel Loan Application Obstacles
Applying for a hotel purchase loan is not like taking on a car note or even qualifying for a home mortgage.
You should prepare for a greater degree of due diligence on the part of the lenders, given the larger loan sums being granted.
Be sure to have your business plan and detailed financials prepared and do everything you can to boost your credit score to give yourself the best chance of being approved for a hotel purchase loan.