For many entrepreneurs and businesses looking for new ventures and investments, the hotel industry is one that’s worthwhile.
However, not all investments can be fully funded by those wishing to purchase or refurbish these establishments. That’s where hotel financing can come in handy. The proper funding can help both individuals and organisations invest in this type of property.
If you’re interested in financing to start or expand your hotel business, there are plenty of options to choose from. This guide should help you understand what’s available, how you can use this financing, as well as the ins and out of each finance option.
Types of Hotel Financing Options
There are various hotel financing options to choose from, whether you’re looking for something short-term or long-term. The types of hotel finance are important to understand and be aware of so that you’re picking the best for your needs as an investor.
Despite the pandemic, this year is set to be a good one for hotels, with the forecast revenue per available room in London will return to between 43% and 86% of pre-pandemic levels. So investing in the hospitality sector is going to pay off.
Short-term finance
A short-term finance loan can help to purchase the property or to carry out renovation and refurbishment. These could include the following:
- Purchasing a hotel before selling an existing property.
- Helping with cash flow restrictions that are holding certain projects back from being started or completed. Bridging loans are helpful in this regard to help when money is tight.
Pros
- Great for short-term payment periods.
- Best for getting finance quickly.
Cons
- Higher rates are incurred.
Light refurbishment bridging loans for hotels
A bridge loan is a great way of helping to fill the gap with finances when there are building regulations required, or there’s no planning permission available. Examples of this loan in use would be for:
- The uninhabitable properties where standard mortgages wouldn’t cover.
- Where ‘permitted development rules‘ are applicable, allowing the property to be changing from one building type to another, e.g. office buildings to residential flats.
- Internal redecorations that are fairly minimal in cost.
Pros
- Useful to secure finance on properties that fall short of standard mortgages.
- Good for those with strong exit strategies.
Cons
- Risky if your exit strategy isn’t effective.
Heavy refurbishment bridging for hotels
These are bridging finance loans where it’s required for properties to have planning or building regulations in place. It also covers the change of use for the building premises. In this case, changing an office block into a hotel. Examples of this are:
- Basement excavations and loft conversions.
- Property extensions to add value to the building.
- Residential property that is being transformed into a commercial property.
Pros
- Good for adding extensions and for big, costly projects.
- Helpful for businesses that don’t have enough capital for these major growth projects.
Cons
- Bridging loans can carry more risks.
Second charge bridging for hotels
These hotel loans are useful when the property has an existing mortgage, and capital is required for other parts of the hotel’s development. Examples of which include:
- Hotel improvements – extensions and loft conversions
- Deposit for another hotel purchase.
- Paying off tax bills or funding other daily business expenses.
Pros
- Useful for making essential improvements.
- Helps you keep hold of your capital.
Cons
- Collateral is required for this type of loan, meaning a risk to your assets.
What Can I Use Hotel Financing for?
You can use hotel loans for any manner of expenditures and investments that are required when delving into the hotel business. So whether you’re looking for hotel loans that will expand your current property or you need the cash flow to support your hotel business through tough times, there’s a lot out there to choose from.
Your requirements will influence which hotel loan option or financing is best for you. As real estate is a great investment opportunity, it is beneficial to use a hotel loan to expand your ventures, whether this is your first hotel property or a second, third or fourth.
Do I Qualify for Hotel Financing?
In order to qualify for hotel financing, you’ll need to pass the eligibility required by the lenders themselves. This can vary from one lender to another and could be down to the amount you’re borrowing, the affordability, risk, etc. With that being said, you want to have an LTV ratio of between 60-70%.
For helping improve your chances of qualifying, it’s worth making sure you have a good business plan, have the desired deposit required and better your credit score rating if you haven’t already.
What You Will Need Before Applying for Hotel Financing
In order to apply for any financing in general, there’s usually a certain level of paperwork and document collecting that you’ll need to do. In the case of hotel financing, some loans or borrowing options will require a business plan and relevant business documents.
Make sure that you’ve got a business plan in place for those lenders that will want to see it and any business documents that need to provide proof of your finances or assets.
Having all of this in place ahead of time is going to help with your level of professionalism when lenders look at you and assess your application.
How to Apply for Hotel Financing
When applying for hotel financing, much of the lender’s approach is somewhat similar to the next. Here’s a brief step-by-step of what you can expect when applying for hotel financing:
- Take a look at the lenders available.
- Find a lender that suits your requirements and fill out an application form.
- The lender reviews the application, assesses your borrowing power and makes an offer.
- You can choose to then accept or reject the offer.
- Relevant paperwork is exchanged before the final signatures are given.
- The application is processed, and the hotel loan goes into your bank.
For any SBA hotel financing, it’s essential to be aware of the process in general so that you can best prepare for it ahead of time.
Can I Get Hotel Financing If I Have a Bad Credit Rating?
In order to get hotel financing, it’s important to have a good credit rating. It’s not essential, but without a good rating, you’re likely to find it more difficult to secure a good lender. With a bad credit score, you’ll see a limit to what lenders you can borrow from, how much you can borrow, and the lower interest rates available.
Where you can, it’s helpful to improve your credit rating before applying for a long or short term loan.
Who Offers Hotel Financing?
Hotel owners are becoming increasingly more popular as an opportunity for investment. UK hospitality occupancies are at an all-time high of 76%.
When assessing the market, there are lots of hotel loans to choose from. Whether that’s private lenders for construction projects to high-street mortgages on commercial real estate. There are a lot of options, so even if you don’t feel you fit the initial criteria of most lenders, you may be surprised at what you can get.
Which Hotel Financing Option Is Right for You?
The right hotel financing option depends on what the money is being used for. You may be using it for a hotel purchase, in which one of the longer-term loans might be required. Perhaps you need it to fund portfolio acquisitions with other businesses?
Knowing what you’re using the money for is going to give you a clearer direction of whether a bridge loan or a hotel loan from the bank is going to be more effective.
Final Thoughts
When it comes to hotels loans of any kind, it’s essential to consider your requirements and protect your finances and assets in general. For hotel businesses, it can be very easy to face cash flow issues, and you want to ensure you always have enough cash to pay back the hotel loan itself.
For small businesses, how you spend and invest your money is critical, so be wary of what you borrow when you’re only just starting out in this industry.
FAQs
Do I have to pay back a government grant?
A government grant is typically money that’s given to the individual or organisation, and there’s no intention to pay it back. If you’ve got the opportunity to take a government grant, it’s certainly worth taking.
How soon can I receive a business loan for my hotel?
The amount of money you can receive will depend on the lender themselves. However, when accessing a business loan, you can receive your money within hours or days. Again, this depends on the lender you choose.
What is the difference between a secured and unsecured business loan?
There is one main difference between a secured and unsecured business loan. A secured loan requires collateral as security against the loan. This might be any of your assets from property to equipment, etc. Unsecured loans don’t require collateral to receive them.
What credit score will I need to secure hotel financing?
A good credit score is going to be helpful in you securing a suitable lender that will provide great interest rates and a fair agreement. With a bad credit score, you may have limits to what you can borrow.