It seems that the hotel industry is experiencing a massive increase in growth. According to a 2017 study by Expedia, travelers spent more per night staying in independent hotels compared to branded properties. Even in 2020 and the years to come, this trend isn’t likely going to fade soon.
As such, hotel owners should ensure to be on top of their hotel financing in order to make the most out of this trend. Without proper financing and with a shortage of funding, they’ll most likely lose major revenue.
If you already have your own hotel or are planning to buy an existing establishment or start a new one, you will most likely need to borrow money in order to turn your dreams into a reality. Luckily, there are a couple of hotel financing options you can choose from. By choosing the best type of hotel financing, you’ll be able to keep your hotel running efficiently while allowing you to gain a foothold in the hospitality market.
That said, let’s check out what these options are.
Hotel Financing Options for Current and Aspiring Hotel Owners
If you’re planning to start your own independent hospitality business, then you can choose from one of the following hotel financing options to help you get started:
- SBA 504 Loans
The 504 Loan program is particularly useful for hotel financing as it allows for carry fixed rates and higher loan amounts. This means that it’s often the perfect option if you’re planning to buy a hotel establishment or develop a new one.
Generally, an SBA 504 loan comes with the following features:
- Fixed interest rates at around 5-6%
- High loan amount up to $14 million
- 10-20 years of repayment terms
An SBA 504 loan consists of two loans: one from a traditional lender and the other from a Certified Development Corporation. One of its major advantages is that as a borrower, you only have to cover 10% of the total cost of your project while the remaining 90% is split between the CDC lender and the government. The caveat is that it has a number of restrictions. For one, the proceeds from a 504 loan should only be used for buying fixed assets.
To qualify for this type of financing, you have to meet the SBA’s size standards for small businesses. Aside from that, you should also have a net worth not exceeding $15 million as well as an average net income not exceeding $5 million two years before the application.
- SBA 7(a) Loans
The SBA 7(a) is by far the most common loan program for hotel financing purposes. It works best for hotel funding due to the following features:
- High loan amount of up $5 million
- Low interest rates at around 5-8%
- Up to 25 years of repayment terms
The loan you get from an SBA program can be used for operational expenses, construction, pre-existing business acquisition, and more. Needless to say, it can meet almost any funding you need for your hotel business.
Compared to an SBA 504 loan, you will need to have a credit score of at least 650 and minimum business revenues of $100,000 per year to qualify for this financing option.
- Hospitality Line of Credit
On the other hand, if you want access to capital for starting your hotel business without any further approval, then a hospitality line of credit is an excellent choice. It’s basically a type of financing that allows any small business owner to access funding whenever they need it.
Compared to a term loan that includes several requirements, preapproval, and several processes before the funds are given, a line of credit is a lot more accessible and convenient. When you draw funds from a line of credit, you will have to repay the borrowed amount along with the interest over a certain repayment term agreed upon.
The good thing about this financing option is that your credit limit will go back to its original amount upon successfully paying the borrowed money in full. The downside is that the amount you can borrow is fairly limited, often up to a maximum of $500,000 only.
- Equipment Financing/Leasing
This type of hotel financing is designed for hospitality businesses that don’t have access to funds for buying or leasing the necessary equipment outright. It also works for those that don’t want to apply for another loan to acquire the equipment.
Through equipment financing/leasing, you can have the required capital to buy or lease the equipment you need for your business. Moreover, the funding is secured by the very equipment you buy or lease.
- ACH Hospitality Cash Advance
The ACH (Automated Clearing House) hospitality cash advance is a common type of merchant cash advance intended for capital purposes. However, it’s technically not a loan since you will have to agree to sell the revenue you receive from future sales in exchange for upfront capital.
This is the perfect option if you need a very quick means of financing your hotel business or if you have a very poor credit that makes applying for a loan too complicated. Compared to SBA loans, the amount you can borrow is limited to a maximum of $500,000.
Another form of a merchant cash advance that you can use to finance your hotel business is the MCA split. An MCA split involves splitting a percentage of your credit card sales every day as a form of repayment to your funder. Also, you’re limited to a maximum funding of $250,000. Meanwhile, the ACH cash advance involves repaying a set amount to your funder’s bank account every business day.
Deciding on the Perfect Hotel Financing Option
With the availability of several financing options for your hotel business, it will be a lot easier to start your very own independent hospitality business even without having any funds in your bank account at all. However, before you decide on a specific financing option, make sure you weigh your options first and determine which among them works best for your current financial status and can suit your specific business needs.