Hospitality Financing: What are your Options?
Hotel ownership can be extremely profitable, especially if you have the right financing. The right loan should allow for flexibility for renovations and/or provide repayment options that complement your operational milestones.
Whether you are contemplating buying an existing hotel, purchasing a franchise, or starting your own business—there are a few considerations that remain true across all industries:
Consider the location of your prospective hotel before you invest in it.
For a hotel to succeed, it needs traffic—which means its success is highly dependent on its location. Guests book destinations for generally one of these main reasons:
- It’s near a popular tourist spot.
- They want a unique experience.
- They are passing through the area.
Most often, a combination of the three applies.
Examining existing and historical cash flow is essential before acquisition.
Historical revenue data helps entrepreneurs navigate their businesses effectively. Reviewing historical financials reveals busy and slow seasons— showing trends and cash flow patterns. The more you learn about when a hotel is active and when it is slow, the better you can forecast and prepare with sufficient cash for maintenance costs, payroll, or equipment needs during slow seasons.
Consider whether this hotel will still be a destination for travelers in 15 years.
What will the future of this hotel look like? Is it close to an interstate that’s always busy with travelers? Or near a destination like a stadium or historical landmark? Can the property stand alone as an attraction itself? Travelers generally would rather stay at locations where they can explore instead of putting up with logistical limitations.
Once you’ve found the perfect property, it’s time to acquire capital. Depending on your needs and goals, there are several different options for how this can be done.
Conventional Bank Loans
If you want funding to expand your hotel, renovation project, or new construction, then a traditional loan might be your first choice. With these types of loans, there tend to be fewer restrictions on how the money can be used and some significant advantages. Because they are not from a government source, funds can be used for operational costs, including renovation, expansion, payroll, and even marketing.
SBA 7(a) Loans
Unlike most conventional loans, SBA 7(a) Loans are backed by the United States Small Business Administration and come with a set timeframe for repayment. The government guarantees a large percentage (75% or 85% for 7(a) loans) of the loan against default, significantly reducing the risk for the lender. Because the government backs it, the approval criteria are stringent. However, it generally comes with lower interest rates than most conventional loans.
SBA 504 Loans
The SBA 504 loan, a more complicated version of the traditional 7(a) business loans, is attractive to many hoteliers looking for cash. In this type of financing, two different lenders combine one long-term low-interest rate package.
U.S. Department of Agriculture’s (USDA) Business and Industry (B&I) Guaranteed Loan Program
The USDA loan program is another way to purchase your new hotel. Like all government-backed loans, these B&I mortgages come with particular criteria you’ll need to qualify for—including a property located in a qualifying rural area. Borrowers must prove that their project will create jobs while investing in environmental improvement initiatives.
Old & Historic Hotel Renovation
The acquisition of older hotels can be an excellent opportunity for those looking to invest in hospitality. Depending on the scale of the renovations, loans can be significantly smaller.
If your hotel qualifies, you can consider using the United States National Parks Service to acquire tax credits to fund renovations and restorations and potentially earn as much as 20% of your expenses back as a tax credit.
About Our Lending Products
AVANA / Extensia Financial provides conventional financing to businesses in various asset classes, including hospitality projects. Our Commercial Real Estate loans range in size from $2.0 to $25.0 Million and generally have terms of five to ten years and amortization of up to 30 years.
Our SBA 504 1st Mortgage Loan is designed to help entrepreneurs acquire, renovate, build, or purchase commercial real estate. These loans allow the small business owner to own their building with a reduced down payment and still retain a low long-term fixed rate while preserving working capital that can be used to grow the business.
Our Commercial Construction loans support growing businesses and help preserve wealth. Our lending experts are there for every step and help guide large projects from start to finish. Our team takes the time to understand the complexities of your industry, market, and project needs and facilitates communication with third parties to ensure that your construction project is completed on time and within budget.
Extensia Financial is one of the most seasoned credit union service organizations (CUSO) focused on commercial real estate.
Our lending experts have a wealth of experience in the Commercial and Multifamily sector and can guide you through each stage of the process.
Our loans range in size from $1M to $30M and generally have terms of five to ten years with amortization of up to 30 years.