Whether buying and operating or building from the ground up, hotel financing revolved around the process of securing commercial real estate and developing a solid business model. This is often dependent on access to funding.
What is Hotel Financing?
Hotel financing refers to any type of lending related to the purchase, development, upgrading, or renovations of a hotel. These loans can help investors to meet their goals and establish a new service for the community.
Investors may need to borrow money for all stages of this process. The funds may come from loans and grants, as well as private investors. Often, investors use several sources of funds to meet their obligations. The amount needed is often dependent on numerous factors, including the size and scope of the project and current interest rates.
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Purpose of Hotel Financing: What Can You Use It For?
Hotel financing may be used for all types of investments related to the property. This may include:
- The purchase of land to build a hotel on
- The purchase of an existing hotel
- The development of the property, such as the building of a new hotel
- The redevelopment of the property
- Renovations and updates to the property
- Relocating the hotel
- Purchasing new hospitality equipment or upgrades
- Refinancing an existing hotel
- Funding operational expenses for the property
- Expanding hiring for the existing hotel
Types of Hotel Financing Options
Numerous types of hotel financing are available, all with the goal of providing an investor with the amount and structure desirable for the type of project at hand. The following are some of the most common types of hotel financing.
Traditional Hotel Financing
Traditional hotel financing is obtaining a loan from a commercial lender and using it to manage the project. There are several types of funding options that fall under this area:
- Standard hotel loans: These typically have a standard fixed interest rate and a loan term assigned to them. The borrower repays the funds on a monthly basis to the lender based on the terms agreed upon by all parents. The borrower repays the borrowed funds along with the interest that accumulates on the loan.
- Permanent loans: Often used for hotels being built from the ground up, these loans can provide funding for the construction phase of the project. Once the property is built, the loan converts into a traditional mortgage on the property. This method minimizes the need for the borrower to obtain two loans for each phase of the process.
- Bridge loans: Hotel bridge loans are a type of funding that helps to provide cash during the period of purchasing the property and the final construction of the loan.
- SBA hotel financing: The Small Business Administration provides loans for small businesses that can be used for the purchase and development of hotels of most types. With government backing, these loans may be more affordable to borrowers with lower interest rates. These loans can be challenging to qualify for in some situations.
Alternative Hotel Financing
Other sources of investment funds are sometimes available to borrowers as well. Consider a few avenues that may play a role in this process:
- Preferred equity: This type of funding method provides a hotel with credit that it can use for upgrades and development in exchange for preferred hotel shares. For those with a larger hotel that needs to make upgrades, this type of method can help to increase the number of shareholders to raise funds to support the hotel.
- Mezzanine financing: This type of loan utilizes equity and debt. That is, the lender will grant the borrower money and a loan that is repaid with interest. The lender will then exchange those funds (money and the loan availability) in exchange for shares in the hotel.
This type of loan is more flexible and may be easier for some borrowers to qualify for compared to traditional loan options. However, this type of loan structure tends to have a higher interest rate.
How to Qualify for a Hotel Loan
Prior to providing any funding, investors must have a good idea of the loan’s needs and the lender themselves. That is, they must have a solid understanding of who is investing, what the money will be used for, and how the loan will be repaid.
Often, a hotel business plan is a core component of this process, allowing the borrower to fully explain all aspects of the hotel’s financials ensuring a clear understanding of what is going forward. This business plan will help investors understand that the hotel will be a viable business and what the financial forecast for the property is. Ultimately, this allows for a comprehensive analysis of whether any loan is worthwhile from the investor’s standpoint.
5 Tips to Secure Financing for Hotels
Consider a few key tips when it comes to securing hotel financing for any project.
#1: Self-funding can help investors to be more confident
Whenever possible, raise funds from others, including from the investor’s savings, friends, family, or other investors. This can help to minimize some of the risks the bank perceives as occurring, and as such, they may be more willing to lend at a competitive interest rate.
#2: Explore available government grants
Depending on the area, grants may be available from local, county, or federal organizations to help cover some of the cost of building a hotel. This may be done, for example, if a community wants to expand its tourism reach within a given area but needs more hotel rooms to do so. The community may offer a grant to help with funding, at least in part, of the new hotel. Grants do not require repayment but can be hard to obtain.
#3: Ensure a full risk analysis is completed
Investors want to know about the risks associated with any transaction they enter and to do that, they need to see a third-party risk analysis. This will allow the investor themselves to better understand what their opportunities are and what limitations may apply to them as well.
For example, in a risk analysis, it may be found that the hotel could be a necessary investment for the region and, therefore, a worthwhile investment for lenders.
#4: Create a pitch deck
Make it clear what opportunities exist through this funding. A pitch deck that provides not just clear information but a visual display of what the money will be used for can help encourage investors to offer support. The key to a pitch deck is to ensure it provides a clear message of why this is a good investment for the lender.
#5: Make a clear roadmap evident
Make sure that the details of any transaction clearly outline how the funds will be used, what the ultimate financial picture looks like, and what the value it offers is. It is a combination of all of these factors that can help to secure a loan.
Wrapping Up: Hotel Financing
Hotel financing or hotel development financing can be a complicated process, but it can also be more readily available to investors who have a comprehensive strategy in place and who have developed a strong business plan. The key here is for borrowers to have a fully outlined plan for what they plan to do, why they believe it to be viable, and how the fund will be repaid over time. Hotel financing, then, can be a key way to establish or grow a hotel business.