Business Loans for Hotels and Motels
Financing a hotel, motel or other type of hospitality company can be a large undertaking. But if you own or are thinking of investing in a hotel or motel, the state of hotel and motel loans can actually be one of the biggest advantages you have. Hotel and motel loans are some of the best ways to get started or grow your business in the hospitality industry.
If you're thinking of investing in a hotel or motel, this hotel financing overview may validate that decision. Investors will also find that due to record growth, getting a hotel loan is one of the safest loans lenders can make, so the competition among banks and other lenders that provide financing for hotels and motels is at the highest point in history. Loan default rates in the hotel and motel sector have consistently been among the lowest out of the top ten major business sectors in the US. This means favorable borrowing rates and better terms for owners/borrowers.
The U.S. Hotel and Motel marketplace (known collectively as part of the "Lodging" or "Hospitality" Industry) has experienced record growth in the period from 2011-2018. Business performance in this sector is measured by two metrics. Record occupancy rates (the number of rooms occupied on a monthly basis) and the average room rate (the amount charged for a night's stay) climbed to record highs in 2018. The U.S. Hospitality industry has continued to be one of the most consistent and stable performing sectors of the U.S. economy. Securing business loans for hotels and motels has become one of the hottest areas of small business loans as a result.
According to Statista, the U.S. Lodging industry reached an all-time high of $208 billion in 2017, up almost 95% from the year 2001. Since 2001 the Lodging Industry has experienced on one year-over-year decline in revue growth. And while the Lodging Industry has experienced periods of flat (and declining) growth based on economic trends; the long-term trends show a resilient and robust pattern of growth and expansion.
In addition to fueling American economic growth, hotels, motels, and other lodging industries have offered the highest rates of debt repayment compared to other types of commercial real estate. If you're looking for hotel financing, you will find a wealth of data on this page to support your research on applying for a hotel loan.
Understanding the Hotel Loan Marketplace: Do Your Homework
Purchasing a hotel or motel is similar to other types of business loans in many ways. However, the business of operating a hotel can be complex and requires a wealth of experience and training. For smaller hotel and motel owners the business is usually a labor of love, a family-run operation or a retirement plan, such as an inn, motel or a bed and breakfast. And in these cases many owners are single facility purveyors (own only one hotel or motel). While the industry is thriving it is important that prospective borrowers follow some basic steps to prepare for getting a hotel loan. These include: (at a minimum) preparing the business plan, doing a competitive analysis and a market study. Loans and loan terms are somewhat discretionary and being properly prepared may tip the balance in approval, rates and terms. It is important to make the right decisions and secure your hotel loan on the right terms; there is little room for error for smaller operators.
Securing a hotel loan requires a lot of preparation. Consideration of land or building purchase, staffing, insurance, licensing and marketing are all key issues (and cost centers)that can mean the difference between success and failure.
Market Research & Hotel Location
Location is the single biggest factor to consider when either researching your hotel purchase or looking to finance an existing property. More specifically, the location of your hotel or motel will determine who your target customers will be. If you acquire a property in a major city, you will likely attract a mix of business and tourist clientele. If you are looking at a remote location near the beach or in the mountains, you are likely to attract family vacationers; that's a pretty simple concept, right? However, the marketing and staffing implications may be completely different.
Experts suggest looking at location from a broader perspective first to understand the dynamic of the marketplace. Things to consider when researching locations for a tourist/sightseeing venue are: the proximity to major attractions, accessibility to the location and competition. For business-oriented locations, you'll want to consider local travel patterns, proximity to transit hubs, convention centers or possibly even whether your property has meeting space to offer as well.
Doing your research may be a bit simpler than you may imagine. Today, logging-on to major travel search sites can help you identify how certain properties and locations are doing in your target market.
Build Versus Buy: Using Your Hotel Financing Wisely
Many prospective hotel owners will look to buy an existing facility as opposed to building one from scratch. In many cases this will be the logical option. However, consider that your hotel loan may just be the better option to build versus buying an existing property. Hotel financing through the Small Business Administration (SBA) and a local Certified Development Company (CDC) 504 Loan program may be an ideal option for this type of plan. We'll discuss financing options in more detail below.
New hotel construction may be particularly wise (but very expensive) when you can identify population growth areas that are presently underserviced by the existing lodging facilities and where existing occupancy rates are higher than national or regional averages. An alternative to new construction may involve an acquisition of an existing facility that you will modernize and/or expand; in this case an SBA/CDC 504 hotel loan may be ideal.
With destination-area hotels (vacation destinations), keep in mind that stay durations continue to climb and hotel owners need to consider what these extended stays mean for your guests. Perhaps laundry facilities, a business center with computers and Wi-Fi. Anticipating and catering to your guests' needs is the essence of the hotel business.
Adding certain amenities to an existing facility may be more cost effective and allow you to increase your room rates considerably. Amenities such as: a gym, courtesy transportation vehicles, indoor or outdoor swimming pools, saunas, hot tubs and outdoor decks are attractive to visitors and may give your facility an edge over the competition. Keep in mind that adding amenities involves maintenance costs in addition to the initial costs, so you'll also need to have financing in place for those recurring expenses.
Carefully planning your facilities offerings and amenities, and reviewing operational costs will help you to write your business plan efficiently and accurately. A solid business plan will also give you a clear understanding of your hotel financing requirements as well as your ongoing operational profit and loss profile. In order to secure your hotel loan, you will need to show that you can repay the financing from the revenue of the business.
Hotel Loan Types
Loans for hotels can be used for a number of purposes. First and foremost, hotel loans can be used to buy land, buy an existing hotel, or construct a new one. If you already have a hotel and are looking to improve it, loans may be used to fund renovation projects or to purchase new equipment or cover various expenses, either short-term or long-term.
Traditional banks and specialty hotel finance companies tend to favor higher quality hotels in prime locations, leaving smaller and independent properties struggling to secure financing. In addition, banks typically require borrowers to make a 20-50% down payment on a hotel property in order to receive loan financing. These high out-of-pocket expenses can prevent smaller ventures in the hospitality industry from accessing the funding that they need to grow and develop their businesses.
It is well-known that independent hotels often have a harder time securing financing in comparison to branded hotels, which often have a transparent and proven business model in place for lenders to see. This is similar to other types of businesses, most notably in franchise ownership. Below we will explore the most popular types of hotel loans.
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Traditional Bank Hotel Loans
Banks are still the leading source of loans for hotels. However, while banks lead in virtually every category of business loans, bank lending for hotels is highly concentrated on the larger, branded properties. As mentioned above, smaller lodging properties are more difficult to finance through a traditional bank.
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Small Business Administration (SBA) Hotel Loans
The United States Small Business Administration works with qualified lenders to guarantee loans to small businesses. Just a reminder, the SBA does not lend money directly to businesses. They guarantee a portion of the loans made by banks or other SBA-authorized lenders in the event that borrowers default on their loans. Banks have a much lower risk profile with SBA-backed loans and will aggressively pursue this type of loan.
The SBA loan program also mandates maximum interest rate and repayment thresholds that are much lower than those offered through traditional lending institutions. In addition, an SBA loan often requires a smaller down payment or out-of-pocket expense than traditional hotel loans. Within some of the general SBA lending guarantee programs like the 7(A) Loan Program, borrowers may access loans up to $5.5 million to fund their hotel project or acquisition.
If you qualify, a hotel loan through the SBA is an excellent option. That said, getting approved for hotel financing through the SBA is not easy. The SBA has very high credit standards for applicants and there is extra paper-work involved in an SBA loan. This inevitably adds more time to the decision-making process as well. You can expect your SBA application to take up to three months to be approved and for funds to be disbursed.
SBA 504 Financing - For larger hotel loans on projects that include the purchase of property or building expansion that require more than $5.5 million in loans, the SBA 504 program may be an option. The 504 Loan Program uses a hybrid collaborative approach in conjunction with local and regional Certified Development Companies (CDC's) to finance development.
504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.
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Real Estate Investment Trusts/ Investment Pools
A Real Estate Investment Trust (REIT) is a legal entity that buys or invests in real properties using funds from individual or institutional investors. In many cases a REIT will seek to acquire an equity ownership position in the hotel property. This type of financing has several benefits. With a Hotel REIT as your partner you will likely have a group of experts to help guide you decision-making process at every step of the way. In addition, REITs are long-term investors who are likely to provide ongoing support and be a source of additional capital.
Another benefit of partnering with a REIT is the potential for future opportunities. REIT's are always expanding and require competent managers. If you are successful in one venture, you may get tapped to grow with the investor group.
The downside of having a REIT or other hotel specialty pool investor is the potential loss of decision-making independence. Usually, these entities will insist on retaining a lot of control over major business decisions.
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Hybrid Approach to Hotel Financing
If you are a smaller prospective hotel owner, chances are your property may not qualify for some of the above programs. Not to worry, this is the case with over 80% of small business owners seeking business loans. Even if you don't qualify for an SBA loan, a traditional bank loan or private funding all at once, it is more likely that you may qualify for smaller amounts from each of these sources.
For example, you may go to a bank to get a mortgage for your 10-room bed and breakfast, go to the SBA to get a working capital loan, use a line of credit to purchase supplies (beds, furniture, linens). Working with a financial technology firm like Biz2Credit, your case manager can assist you in getting a consolidated loan or helping you to achieve this hybrid approach to getting your hotel the funding it needs.
Two important tips are:
Providing proof of profitability - For any business operation, it is important to demonstrate to the lenders that you are running a profitable and sustainable business model when applying for loans for hotels -- especially if there is not much known about the hotel or it's not going to be flagged with a nationally-recognized brand.
Having a marketing plan in place - Right out of the gate, brand name hotels have an advantage over independents when it comes to funding because lenders already have awareness of the brand. While independents possess an unknown factor, and thus, lenders are going to want to know more about the marketing plan in place to attract prospective guests. In short, they want to be convinced that rooms will be filled.