The hotel industry is growing and showing no signs of slowing down. On average, Americans spend 26% of their travel budget on hotel lodging. Competition is intense in the hospitality industry, and upward trends make it vital for hotel owners to stand out from the rest.
Hotel owners need to be on top of their financing options so that they don't lose valuable revenue. Hotel financing allows hotel owners to run their businesses at their full potential.
Thankfully, there are many hotel financing options available, depending on what your hotel needs. Let's unpack some reasons why your hotel may need financing, as well as the best loans available for hotel owners.
What Are Reasons Your Hotel Business Would Need Financing?
Hotel financing is necessary if you plan to build a brand new hotel from the ground up. But what about other business operations?
Hotel financing is helpful for many different reasons. Some of the reasons may even surprise you! Financing is great for new projects, renovations, and cash safety nets.
Build a New Hotel
The average 3-star hotel in the US costs $22,000,000 to start. However, luxury 5-star hotels can cost more than $60,000,000.
These numbers sound intimidating, and there is no hiding that starting a hotel business requires a significant up-front investment. Thankfully, these investments often pay off as the travel and hotel industry continues to grow.
When building a brand new hotel, payments need to be made for:
- Construction teams
- Interior designers
- Hotel staff members
- Cable television
Each room in a standard, good-quality 3-star hotel costs around $221,000 to construct. Costs associated with individual rooms are:
- Windows and curtains
- Air conditioning units
- Beds and furniture
- Bathtubs and showers
Hotel financing is essential for building and starting a new hotel. However, traditional bank loans are often difficult to secure due to the long and strict application process. Thankfully, multiple alternative loans are available for hotel owners, and the application process is much simpler.
Purchase an Existing Hotel
Taking ownership over an existing hotel costs much less than starting a brand new hotel, but the hotel purchase still requires a large sum of money upfront.
Buying an existing franchise hotel can roughly cost anywhere between $195,000 and $7,530,000, and that is just the startup cost. After purchasing an existing hotel, other financial factors come into play, such as:
- Property taxes
- A mortgage
- Payroll for staff
- Utility payments
- Franchise fees
Hotel financing is the best way to fund startup costs so you can start making a large return on your investment.
Renovate Your Hotel
If you’ve been running a hotel successfully for some time, it may be due for updates or renovations. You can choose to renovate the entire building or only specific areas.
Renovation costs will vary depending on your hotel’s market tier. The most common hotel tier classifications are:
- Extended Stay
- High Upscale
The higher the tier classification, the higher the renovation costs. Creating a budget is essential so that you know how much hotel financing you need to secure. Financing can be used for renovations of all kinds, including, but not limited to:
- Technology upgrades
- Updated appliances
- New flooring and paint
- Towels and shower curtains
- Utility tune-up
- Updated lighting fixtures
Buy New Equipment
Did you know that you can get financing specifically for buying new equipment? This type of financing is popular with the medical and construction industries because they require large, expensive equipment, but it can also be useful in the hotel industry.
Buying new equipment for a hotel is a perfectly acceptable reason to pursue financing. Popular types of hotel equipment that need financing are:
- Flat-screen televisions
- Solar panels
- Business operation software
- Security systems
- Ice and vending machines
- Luggage carts
If you're looking to purchase updated hotel equipment, financing can help. We'll take a look at the details of equipment loans shortly.
Increase Cash Flow
Working in the lodging industry requires a certain amount of cash flow, especially if your hotel business is just starting. Backup cash acts as a safety net when customers cancel last minute and during slow travel seasons.
If your hotel business is new, you need cash available to pay your employees while you wait to make a return on your investment. Hotel financing can operate as a fail-safe so that you never have to worry about payroll or billing issues.
Types of Hotel Loans
If your business falls into any of the above categories, you will make a great candidate for hotel financing. Hotel loans are some of the most popular routes to pursue.
Depending on your needs, credit score, and existing financial status, different kinds of loans can finance your business. Here are some of the best loans available for hotels:
The Small Business Administration (SBA) is a government agency that helps entrepreneurs start and grow their small businesses. The SBA does not operate as a lender; instead, they match small businesses to SBA-approved lenders.
SBA loans provide some of the lowest interest rates with long-term funding. SBA loans are low risk for lenders, which makes them popular funding options. There are three popular SBA loan programs. They are:
- The 7(a) Loan Program: Best for business startups or access to working capital.
- The Small Business Microloan Program: Startups and small businesses receive loans of up to $50,000 from intermediary nonprofit lenders.
- The CDC/504 Loan Program: Best for small businesses trying to expand or modernize. Provides long-term, fixed-interest rates.
Of all alternative loan options, small business administration loans require the most thorough application. It is important to note that these are not quick cash flow solutions, and it will most likely take a few weeks to get approved.
Term loans are great business loans for hotel owners. A business term loan is a specified amount of capital that you pay back within a designated repayment time. There are short-term, medium-term, and long-term loans, with short and medium being the most popular options for hotel owners.
A short-term business loan provides capital for purposes such as:
- Renovation Projects
- Working Capital
- Customer Acquisition
- And More
A short-term loan is easier to secure compared to a long-term loan. Once you receive the capital, you have a designated time frame of 18 months or less to repay the money. You can expect to make payments monthly, weekly, or sometimes even daily. Most credit scores are considered, and the repayment terms are shorter to lessen the associated risk. Additionally, hotel financing rates are higher for short-term loans compared to medium or long-term loans.
Hotel bridge loans are types of short-term business loans that hotel owners often take advantage of. A bridge loan can be taken out for a period of two weeks up to one year.
Bridge loans offer coverage for a short period of time until a borrower can secure permanent financing. However, bridge loans have relatively high interest rates and often require collateral.
Medium-term loans are very similar to short-term loans. The only difference is that these loans are available to people with mid-range credit scores.
Because there is less risk for lenders, medium-term loans can allow the borrower up to two years for repayment. Monthly or bi-monthly payment schedules are standard for medium-term loans.
Commercial Real Estate Loans
A commercial real estate loan is a business loan that helps cover commercial mortgage payments. This is a technical way to differentiate residential and commercial mortgages.
These loans make great hotel loans because they are reserved for real estate that operates for business purposes. Hospitality businesses are included, as well as retail stores, offices, and apartment buildings. A certified public accountant can help you navigate the right commercial real estate loan for your business.
Equipment financing is a fantastic option for hotel businesses that are only looking to update equipment. Equipment loans are popular hotel loans because every business needs equipment of some sort, even if it's just computers.
These business loans are used to fund the purchase of equipment that is integral to business operations. For hotels, this can include:
- Shuttle Buses
- Operating Software
Equipment financing is low-risk for lenders because the equipment itself acts as collateral. The best part is that once repayment has been completed, you officially own the equipment.
Other Types of Hotel Financing
Loans are not the only way to finance hotels. Some of the simplest ways to secure hotel financing are through a business line of credit or business cash advance.
Lines of Credit
Business lines of credit continue to be one of the most popular types of financing for all industries. Lines of credit are more flexible than most loan options. A line of credit works similarly to a credit card. Your hotel business is granted a certain amount of funds that you can draw on as needed. The best part is that you only pay interest on the funds you actually use.
Business Cash Advance
The way a business cash advance works is simple. Your hotel business trades a fixed percentage of its daily overall sales in exchange for a lump sum of cash. With a business cash advance, you don't have to worry about making regular payments. Instead, the agreed-upon percentage of your sales will automatically be deducted from your bank account. There is no term limit. Repayment continues until the borrowed amount is paid back in full.
Discover Loan Offers Perfect for Your Hotel
As you can see, the options for hotel financing are ample. Whether you need quick cash for a renovation or large amounts of financing to start a brand new hotel, you will be able to find the perfect financing option for your business.
If you want more information about any of the loans mentioned here, AdvancePoint Capital offers free quotes that will not affect your credit score. Don't wait any longer to secure a business loan that will take your hotel to the next level.