Hotels are an incredibly capital intensive enterprise, involving significant investment in real estate, furnishing of the rooms, and hiring staff to take care of it. Few businesses have as high of an upfront cost as the hotel industry.
As such, most hoteliers require financing to get their business off the ground. In fact, most need several different types of hotel business loans to get it all running. We’ll explain each type of financing, what it can be used for, and the factors that go into deciding how much financing lenders are willing to offer you.
Types of Hotel Business Loans
Hotel owners have a wide variety of financing options available to them, and each has its pros and cons. Consider what kinds of expenses you’ll cover with a hospitality loan, as this will largely determine which type best fits your needs.
SBA 7(A) Loans
These are some of the most common small loans taken out by hotel owners. They can be used for a variety of purposes and come with relatively favorable terms. SBA 7(A) loans can be used to cover working capital, purchase assets like furniture or computers, and pay off any existing debt associated with less favorable terms. The maximum loan under the 7(A) program is $5,000,000 with an interest rate of around 2.5%.
SBA 504 Loans
If you need to purchase real estate or equipment for your business and want a loan with low-interest rates and a longer repayment period, SBA 504’s are the way to go. The loans can only be used to purchase tangible assets, so banks know they can repossess these things if you fail to pay. Unfortunately, closing on these loans can take months, so they’re not a great option for business owners that need cash immediately.
Line of Credit
Hotel owners who need flexibility in their cash flow can benefit from a line of credit. This type of loan is essentially a credit card for the business, allowing you to pay your employees, purchase consumables, or even cover your tax bill. Interest is only paid on what you spend, just like a credit card. The downside is that since you’re often using it to pay for things that are not tangible assets, the interest rate on a line of credit is higher.
Commercial Real Estate Loans
As the name suggests, commercial real estate loans can only be used to purchase the property where a business operates. Lenders will assess the value of the property and its potential as a place of business. Since the loan can only be used to purchase tangible property, the interest rates are lower and the repayment period more generous.
These are the shortest term and highest cost loans in the hospitality industry. The length of the loan can be anywhere between two weeks and a few years, with interest rates between 7% and 9%. They’re intended to cover costs incurred between the purchase of the hotel and the acquisition of long-term financing. The long-term financing is then used to pay back the bridge loan. They’re also one of the best ways to get cash quickly, making them attractive to buyers working with highly time-sensitive property deals.
How You Can Use a Hospitality Loan?
If you’re purchasing a hotel or trying to grow an existing one, there are dozens of different expenses that you might encounter and need a loan to cover. Some of the most common ones are:
- Purchasing a hotel
- Refinancing an existing loan on the hotel
- Buying new furniture for the rooms
- Hiring additional staff
- Covering expenses during a low occupancy period
Not all loans can be used to cover these expenses though. For example, a commercial real estate loan could be used to purchase a hotel, but to hire additional staff you might need a line of credit or an SBA 7(A) loan.
Hotel Business Loan Qualifications
A myriad of factors could decide whether a hotel is a good candidate for a business loan. However, there are a few basic statistics that every lender will want to look at before setting the terms of a loan.
Revenue Per Available Room (RevPar)
RevPar, particularly the RevPar index, is something lenders will look very closely at when determining the terms of your loan. RevPar serves as a measure of efficiency for your hotel and is calculated by looking at the revenue generated for each room and multiplying it by the average occupancy of the hotel. The RevPar index compares the hotel against competitors of similar size and quality.
Debt Service Coverage Ratio (DSCR)
DCSR is one of the most important qualifications that lenders are going to look at as it demonstrates how likely a business is to make its payments on time. It’s a measure of revenue compared against the debt owed plus interest paid. For instance, if a hotel had a net income of $50,000 per month and needed to make a payment of $20,0000 per month on its current debt load, the DSCR would be 2.5. As such, the company could probably take on more debt without being much of a financial risk.
Loan to Value (LTV) Ratio
Whenever you’re purchasing commercial real estate, lenders are going to look at how much the property is appraised for and calculate a loan to value ratio. They’re never going to loan you more than they can sell the property for. In fact, most consider lending more than 80% of the property’s value to be too risky.
This is simply how much revenue the hotel is generating compared to its expenses. Hotels with higher profits and lower expenses are considered a safer bet by lenders.
While there are numerous options for financing a hotel business loan, LendThrive can offer some of the best terms.
Unlike SBA loans and commercial real estate loans, getting approval for a fixed rate business loan with LendThrive doesn’t take months — you can be approved in just twenty-four hours. While bridge loans and lines of credit are much faster, they come with onerous interest rates that make them unattractive for anything but short-term financing.
If you need a hotel business loan, contact LendThrive today to find out what your options are and how we can help you grow your hospitality business.
Frequently Asked Questions
How much can I borrow?
Depending on what you qualify for, LendThrive provides fixed rate business loans that range from $25K to $150K.
How does the application process work?
We understand that loan application processes can be tedious. That’s why we made ours simple. You will be asked to provide basic information about your business for pre-approval. Then, we will pull your credit history and make a decision.
How long does it take to get approved?
LendThrive’s loan approval process is quick and simple! Most loans are approved within 24 to 48 hours.