The Hotel Funding Handbook: Options, Best Practices & More

  • May 3, 2022

Have you always dreamed of opening your own hotel? Would you build it, buy it, or become part of a franchise? Would it be a budget-friendly motor inn or boutique offering in the middle of the city? 

The hospitality industry is an incredibly competitive market, and while running a hotel is no easy task, even finding the financing to get it up and running can be a serious challenge. With so many loan options, each with widely varying interest rates, repayment periods, and credit requirements, you might need some help to make the right choices. Keep reading to learn the ins and outs of hospitality funding.

Things To Know Before Seeking Hospitality Funding

There’s a lot to learn if you want to open a successful hotel. These are some of the most common questions asked by novice hoteliers: 

How Much is the Down Payment?

Regardless of the type of hotel funding you choose, the lender will probably require you to put down at least 20% of your own money. Given that even a small, budget-friendly hotel will cost you $1,000,000, 20% can feel like a lot of money. Lenders need to know that you have a stake in this business venture and they need to ensure there’s enough equity in your hotel’s assets that they can make back their money back in the event of a default.

SBA 504 loans from AVANA Capital provide up to 90% of the funding for a hotel purchase with repayment periods of up to 30 years. Best of all, the pre-approval comes in under 48 hours and closes around six weeks later.

Request a Loan

What Are the Business Plan Requirements?

Lenders need to know that you have a solid idea of how to turn their money into a profitable business. The most important aspect of a business plan is explaining how you’ll use the lender’s money. How much does the property cost? What kind of equipment needs to be purchased? How many employees will you need to hire? Based on thorough market research, how much revenue do you expect the property to generate? How soon can you pay back the loan? Knowing the answers to these questions will help you secure hotel funding.

Should I Buy Into a Franchise?

That depends on the type of hotel business you’re trying to build. Being part of a national brand implies prestige and consistency, which means you won’t need to market your property as heavily. However, for smaller boutique hotels with a niche market (eco-friendly, historic, themed) a major hotel brand and all the requirements that come with it could detract from the property’s uniqueness.

What is a Property Improvement Plan?

Should you decide to join a national franchise you’ll need to bring your newly purchased property up to code with the brand’s standards. National brands expect certain furniture, decor, amenities (fitness centers, swimming pools, or business centers), and security systems, all in the name of providing guests with a consistent experience, no matter which city they’re staying in. These property improvement plans can be incredibly costly and need to be factored into the price of buying any property that’s to become a member of a national chain.

How To Finance a Hotel

There are several options for financing a hotel, each with different interest rates, credit requirements, and repayment periods. Tailoring your financing to your goals and revenue expectations is critical to getting a successful hotel business off the ground. These are some of the most popular financial products to make it happen. 

SBA 504 Loans

Loans from the Small Business Administration have some of the lowest interest rates as they allow traditional banks to lend money with the backing of the U.S. government. Should the buyer default, the lender isn’t on the hook for any losses after assets are sold. The approval process is much slower as both the lender and the SBA need to review your financial documents to ensure your creditworthiness.

The downside to these loans is that they can only be used to purchase tangible goods –– the property, high-value equipment, etc. You can’t use an SBA 504 loan to hire employees or pay utility costs, only to buy assets that the bank can repossess if you default on the loan.

SBA 7(a) Loans

These are some of the most popular loans for hoteliers as they have relatively low-interest rates while giving the hotel buyer plenty of flexibility in how to use the funds. Loans can be up to five million dollars, with a repayment period between seven and 25 years. Loans used to purchase property typically have better interest rates and longer repayment periods since the property can be resold if there’s a default.

CDC Loans

SBA 504/CDC loans are unique in that they combine a government-backed loan with one from a non-profit community development corporation. Their purpose is to assist in revitalizing the community by spurring development and building affordable housing. As such, these loans have low fixed-interest rates that make them very attractive to prospective hotel buyers. They’re a complicated financial product and you’ll need to fill out the paperwork with multiple entities, so expect the approval process to be much slower.

Hotel Bridge Loans

Spotted a hot property and need to put money down immediately? A hotel bridge loan provides short-term financing needed to purchase the property while you await approval from traditional lenders. Bridge loans have higher interest rates than SBA loans or commercial real estate loans with a repayment period of one to three years. With AVANA Capital’s bridge loans, you can get funding in as little as three days, helping you take advantage of the fast-paced commercial property market.  

Need Help Deciding Which Loan Is Best for You? 

If you are wondering how to choose the best loan to fund your project, AVANA Capital’s expert lenders are always available to provide advice and answer questions about our hospitality financing solutions. Our experts can help guide borrowers every step of the way to ensure a quick, seamless, and cost-effective process. The AVANA Capital team has extensive experience in the complexities of hotel construction and will work with you throughout the life of your project. Our talented financiers provide simple loan forms and reliable financing to ensure you don’t have to worry about breaking your budget.

Fund Your Hotel Purchase With AVANA Capital

Now that you know about hospitality funding and different types of hotel financing, it’s time to get started. AVANA Capital specializes in hospitality funding and can provide you with the money you need to make your hotel owner’s dreams come true.

AVANA Capital facilitates growth through hassle-free direct lending. With over 150 years of combined experience, our team can serve you by providing fast, flexible, and reliable financing. Pursue your newest venture with help from AVANA Capital.

Apply for a loan today or contact us for more information.