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Traditional Loans vs. Advances for Financing Your Hotel

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Building a brand new hotel, starting a franchise location, or renovating your existing hotel are exciting projects. While these projects may be thrilling to undertake, the hotel industry is expensive. Hotel owners rarely have the required cash on hand to complete large-scale undertakings. So how do they do it? Hotel owners finance their hotels with a loan or cash advance.

Hotel financing allows hotel owners to run their businesses at their highest potential. The hospitality industry in America continues to grow each year, and it is a key part of a healthy economy. Hotel financing is essential for hotel owners to stay on top of the rising demand.

There are many loan and advance options available to hotel owners, and hotel financing can be used for buying, building, renovating, or refinancing hotels and motels. Let’s take a look at the difference between traditional and alternative loan lenders, how loans and advances differ, and finally, the best financing options for your hotel.

Traditional Lenders vs. Alternative Lenders

There are two common ways to secure hotel financing. One way is through traditional lenders, and the other is through alternative hotel lenders. While the two premises are similar, they have differences in applications, approval times, and available financing options. Let’s unpack the difference between traditional and alternative lenders.

Traditional Lenders

Banks are the most common type of traditional lender. Traditional banks tend to be risk-averse. Banks tend to prefer for business owners to provide collateral to reduce their risk.

Collateral is an asset held by a borrower with the same or higher value of the amount of money borrowed. If the borrower cannot repay the loan, the lender has the right to take the collateral. Assets commonly used as collateral include homes, vehicles, savings funds, and more.

For new business owners, providing collateral can be difficult. Hotel loan decisions are usually made from the following factors:

  • Credit score
  • Payment history
  • Cash flow history
  • Projected earnings

Traditional hotel lenders often require a lengthy application process that can take between four and twelve weeks before funds get approved. The application itself is long and complex, as it involves a lot of paperwork. Often, banks and applicants go back and forth for many weeks negotiating terms and eligibility.

Banks tend to charge lower interest rates, so they make their money by extending a fee structure beyond 12 months. Hotel owners who have been established in the industry for many years are best suited for traditional bank loans.

Alternative or Online Lenders

Alternative or online lenders tend to assume most of the risk, unlike banks. Alternative lenders are famously more receptive to new businesses with poor credit. Hotel business owners with little to no credit history are often able to secure a loan through online lenders. Alternative lenders often provide many unsecured loan options, which require no collateral.

Compared to banks’ slow application approval process, alternative lenders are known for their fast turnaround times. Applications are often simpler to fill out with online lenders, and finances can get approved in a matter of hours so that borrowers can receive funds in just a few days.

Alternative lenders usually have higher interest rates, but they allow borrowers to pay funds back early, often unheard of in traditional bank loans, where banks instill a pre-payment penalty.

Alternative financing is the best funding option for hotel owners who are just starting, have poor credit scores, or need fast funding.

Hotel Loans vs. Hotel Advances

Now that you understand the difference between traditional and alternative lenders, let’s explore the difference between a loan and an advance. Both loans and advances provide adequate working capital for hotel business owners.

Hotel Loans

A loan is defined as an amount of money given in the form of debt in exchange for the future repayment of the same amount plus interest. Both the lender and the borrower mutually agree on the terms of the loan. These terms include:

  • Amount of money lent
  • Amount to be repaid
  • Number of payments to make
  • Repayment period
  • Collateral, if any

With a loan, the borrower makes payments in the form of installments or a lump sum. Usually, payments are made weekly or monthly, but those terms are defined in the contract. Loans typically cover long-term requirements.

Hotel loans are usually used for building construction, working capital requirements, and equipment purchases.

Hotel Advances

Compared to loans, advances are typically lent to borrowers for short-term financial requirements. While a loan is a form of debt, advances are a credit facility granted to customers.

Advances are typically provided for a shorter duration, such as a year. Borrowers need to reapply to receive more credit advances when their term is up.

In some forms of advances, such as merchant cash advances or business cash advances, borrowers secure a portion of hotel business sales for a designated period of time as the form of repayment. With cash advances, you’ll never have to pay more than you can afford because repayment functions around your own sales.

Top 7 Hotel Financing Options

By now, you understand traditional lenders, alternative lenders, loans, and advances for hotels. Are you starting to narrow down what types of hotel loans or advances you want to pursue for your business? Let’s dive into seven of the best financing options for hotels.

1. SBA Loans for Hotels

The Small Business Administration (SBA) is a federal agency that helps small business owners start and grow their businesses through a loan program. The SBA does not lend out funds itself; instead, the SBA matches small businesses to SBA-approved lenders.

A small business loan is one of the most popular types of funding to obtain for many small business owners. SBA loans are a fantastic option for hotel owners seeking lower loan amounts to help with working capital or less expensive needs.

Qualifications for SBA loans are more stringent than most other loan options. SBA loan approval requires a lot of paperwork, time, energy, and commitment. Even though the application process is tedious, many people find it worth it, thanks to the SBA’s attractive rates and payback durations.

Since SBA hotel loans can take four to six weeks to process, they are not the best option for people seeking fast hotel financing. To apply for an SBA loan, you will need to provide your:

  • Business plan
  • Credit history
  • Business credit score
  • Personal credit score
  • Financial statements or projections

Commercial Real Estate Loans

A commercial real estate loan is a mortgage specifically used for commercial properties like hotels, offices, retail stores, and apartments.

The SBA 504 program provides commercial real estate loans to hotel owners. You can use 504 loans to buy or construct real estate.

2. Short Term Business Loans for Hotels

If you need fast cash for your hotel financing, short-term loans are worth looking into. A short-term business loan is a type of financing that provides a company with a lump sum of cash that must be repaid during a fixed period of time.

Typically, short-term loan repayment terms are between six to 18 months, but they are often one year or less. Payments are usually made weekly, bi-weekly, or in rare cases, daily. The short-term repayment period helps lessen the risk of the lender since the qualifications aren’t strict.

A short-term loan is ideal for someone just starting a hotel business with low credit. All credit types are considered, and same-day funding is available.

3. Long Term Business Loans for Hotels

Long-term hotel financing options have good terms, low fees, and great rates for hotel owners. This funding is typically used to fund long-term hotel projects such as expansions or franchising efforts.

The repayment terms for a long-term loan are anywhere between two and 25 years. Typically, payments are made monthly or bi-monthly. Long-term hotel financing rates are usually more desirable than short-term rates.

Since the repayment period is longer, the requirements are stricter. To get approved for a long-term loan, applicants must have an excellent credit score. While the application process is more detailed, you can get approved for a long-term loan in as little as two days if you meet the requirements.

4. Equipment Financing for Hotels

One of the most popular hotel financing options is equipment financing. All industries, including the hotel industry, need equipment to operate, even if that equipment is computers. Loans for hotel equipment cover items such as:

  • Furniture
  • Computers
  • Operating Software
  • Televisions
  • Shuttle Buses
  • Fitness Equipment

Equipment financing is secure for lenders because the equipment itself acts as collateral. Equipment funding offers low-interest rates and flexible payment options. Almost all credit scores are considered. Once you pay off your equipment loan, you become the official owner of the items.

5. Business Cash Advance for Hotels

A business cash advance is a form of money advance that takes a fixed percentage of future daily sales as repayment. A lender will issue a lump sum of cash, and a portion of the sales made at your hotel business will be automatically deducted and paid to the lender. This process continues until the balance is paid back in full.

Business cash advances increase cash flow for your hotel business. This working capital can help with things like payroll, inventory, remodeling efforts, and more. There is no rush to repay business cash advances because the terms accommodate however many daily sales you make.

6. Merchant Cash Advance for Hotels

A merchant cash advance is similar to a business cash advance, but the difference comes down to credit card sales. While a business cash advance subtracts daily sales for payment, a merchant cash advance specifically subtracts daily credit card sales.

In a merchant cash advance for a hotel, a lump sum of money is provided to a company in exchange for a fixed percentage of future daily credit card sales. The repayment period continues until the fee is paid off. Merchant cash advances are also great options to increase cash flow at your hotel.

7. Business Lines of Credit for Hotels

A business line of credit is a type of hotel financing that works similarly to a standard credit card. A business line of credit is more flexible than a term loan. Instead of receiving a lump sum upfront, your hotel business obtains a pool of funds to draw on as needed.

The best part of a hotel line of credit is that you only pay interest on the funds you actually use. Lines of credit are a good safety net for your hotel. The hotel industry can be unpredictable. So, if an emergency expense appears, business credit is there to cover you.

Business lines of credit are renewable, so your hotel business can draw what it needs, make the required payments, and then renew and draw more funds.

Discover Hotel Loans and Advances to Help Your Business Thrive

Whether you want to pursue a hotel loan or advance through traditional or alternative hotel lenders, hotel finance depends on funding to thrive. As the hotel industry grows, you want to be prepared to build a new location, take over a franchise, or remodel your existing hotel. Whether you need fast cash or long-term financing loans, there is an option that meets your needs.

If you have any questions about business lending for hotels, or if you’re ready to get started with one of the loan options you learned about here, you can get a free quote from AdvancePoint Capital today. Don’t wait any longer to obtain a loan or cash advance for your hotel.

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