Obtaining the right funding to set up your own hotel, buy an existing one, or maintain the one you’re currently operating can be a daunting task. However, with the availability of various hotel financing options these days, obtaining the required funding for a hotel is actually way easier than before.
Hotel financing opportunities you can grab
Despite a lot of high-profile hotels still dominating the hospitality market, the truth is that hotel investment carries a major risk for most financial companies. Therefore, there’s a trend in the hotel financing sector in which lenders are approached for funding smaller hotel projects considering that they have significantly lower risks due to their lower cost basis.
This means that it will be a lot easier for individuals who own a small scale hotel or planning to start one, to obtain the financing they need. In fact, more and more independent hotels are becoming popular with travelers. Apart from that, some even outperform several franchised hotels in other markets.
That said, if you’re looking for funding for your hotel, then here are some preferred options where you can find the right funds for your hotel business:
1. SBA (Small Business Administration)
The SBA is an organization that works with qualified lenders to provide loans to small business owners. However, one important thing to take note of is that the SBA doesn’t provide direct lending to borrowers.
In the event that you qualify, then applying for a hotel loan through the SBA can be an excellent means of funding your hotel business. However, the approval process won’t be that easy due to SBA’s very high credit standards. Apart from that, you will have to fulfill tons of paperwork when applying for a loan.
As a result, your loan application will normally take around 3 months to be approved. This also means that it will take a longer time before you can receive the funding you need. If you don’t need the financial assistance urgently, then it should be a great option; otherwise, you’re better off looking for other choices.
By the way, SBA loans are categorized into two depending on the scale of your project. They’re as follows:
- SBA 504 – This is designed for larger hotel projects with a minimum requirement of $5.5 million in loans. The program makes use of a hybrid collaborative approach in order to finance development.
- 504 Loans – This type of loan is structured in a way that the SBA will handle 40% of a project’s cost while the remaining 50% and 10% are handled by the participating lender and you, the borrower, respectively. However, in some circumstances, you might be required to handle up to 20% of your hotel project’s cost.
Banks still remain the most common option for hotel financing. In fact, they’re the first choice that comes to mind when looking to secure funds. The problem, however, is that most bank lending for hotels is focused on larger properties. Therefore, smaller properties will find it harder to obtain financing via traditional banks.
There’s also the issue of time. In most cases, banks have a very lengthy and complicated loan process which isn’t ideal for small businesses who need financing as soon as possible. Due to that, a lot of online lenders aim to fill the void by featuring lower qualification thresholds and expediting the entire loan application process.
3. Real Estate Investment Trust (REIT)
Likewise known as investment pools, an REIT is an entity that invests in or even buys properties with the help of funds from various investors. Most of the time, an REIT will aim to secure an equity ownership position in the hotel. Despite that, it does come with a number of amazing benefits.
For starters, if you choose to seek financing from a REIT, you will be working with a group of experts who will give you advice and guide you through the decision-making process. Aside from that, investors who belong to a REIT are long-term investors who will most likely offer ongoing support for your business.
Another amazing benefit of working with an REIT is that you’ll have the chance to enjoy future opportunities since REITs are always expanding. Therefore, if your venture turned out to be a major success, then you’ll most likely be tapped to join their investor group.
Despite that, an REIT, or just about any hotel specialty pool investor, will lead to a potential loss of your decision-making independence. The reason is that most of the time, these entities will try to retain control over most of your major business decisions.
4. Friends and Family
Most of the time, seeking funding from official lenders can be a really complicated process with all the stringent options and requirements involved. In this case, you might want to turn to your friends and family for hotel financing as they can provide you with much more leeway to the terms which can be favorable to you.
However, this won’t be a viable option most of the time since your friends and family will most likely have limited funds in them. It does work for small-scale hotel projects, but for the bigger ones, going for loans from official lenders is highly recommended.
Other Approach to Hotel Financing
As a small prospective hotel owner, you might find it hard to obtain proper financing for your project. Even if you go with the fourth option, it might still not guarantee that you can have the funds you need to finance your hotel. That said, there’s really nothing to worry about. In fact, more than 80% of small business owners experience the same problem.
That said, if you don’t qualify for a loan from a traditional bank or perhaps from SBA, then you still have a chance to qualify for smaller amounts from the said sources. For example, you can apply for a bank loan to get a mortgage for your small bed and breakfast business, a working capital loan from the SBA, and a loan to purchase your necessary supplies from a line of credit.