The hospitality industry is lucrative, and it is easy to see why investors want a share of the profitability pie. New investors want to establish hotels while existing players are looking to expand and refinance their operations; all activities meant to secure their stake in the industry. Whether you are looking to construct a hotel, buy, renovate, or refinance one, you need funding, and hotel loans are your funding solution. Money Lender Loans has partnered with investors in Orange County, CA looking to access or grow their investment in the hotel industry, through hotel loans. You too can access this type of funding. Here is what you need to know about hotel loans.
Hotel Loans at a Glance
Hotel loans are commercial and industrial loan packages. Any investor in the industry looking to acquire, build, gain working capital, or refinance their operations can access these loans from any of the two sources:
- Traditional Bank Loans
- SBA Loans (i.e., the SBA 7(a) and the SBA 504 Loans
The choice of any of the above loans is based on your needs and qualifications, as addressed below.
Traditional Bank Loans
Traditional bank loans or commercial real estate loans are accessible to individuals with a pre-existing banking relationship with banks. Their relationship ensures that credit seekers access large sums to finance their business at an interest rate charge of 5 to 7 percent that runs through a period of up to 25 years. Banks often consider such clients as reliable borrowers. As such, there are no credit limits set for such borrowers. Therefore, most banks are willing to fund the entire sums sought by such clients.
A relationship with a bank is not the only guarantee that you can access the funds you apply for. There are specific requirements you will have to meet to qualify for the loan. These requirements are:
- You must have a credit rating of 680 and above,
- Your hotel venture must have been in operation for at least three years,
- You will need to provide a 10 percent (or more) cash down payment,
- Your venture’s Debt Servicing Service Covering Ratio, the DSCR, should be 1.20+, and
- You do not have any tax lien, bankruptcy, or foreclosure issues against you.
Given the stringent requirements banks set as pre-qualifications, many hotel business owners are locked out as likely candidates for conventional commercial loans. However, they still can access funding for their hotel projects. SBA loans are a good alternative.
SBA Hotel Loans
SBA hotel loans are financing alternatives to conventional bank loans. The loans are products of the US Small Business Administration (SBA) programs meant to provide capital for hotel business activities that include acquisition, growth, refinancing, and construction. The administration does not offer SBA Loans but channels the funds to approved lenders through partnerships. The list consists of banks, non-profits, and non-bank lenders. These partnerships ensure a win-win scenario for both lenders and borrowers. Small business owners access the funds they would not have otherwise qualified for from conventional bank loans. Furthermore, the Small Business Authority secures a portion of its funds through the lenders should the loan applicant default in honoring their debt obligations.
SBA loan packages come in two options; SBA 7(a) and SBA 540 Loans.
SBA 7(a) Loans
SBA 7(a) loans are a favorite among many business owners. High loan amounts, low-interest charges inclusive of the fees, and long repayment periods make this credit facility a favorite. SBA 7(a) loans finance hotel projects that need financing of up to $5M. You will be required to repay the loan at a rate of between 5 to 10 percent interest over. Additionally, guarantee fees of between 0 to 3.5 percent will be charged in the loan package.
Repayment periods vary depending on the needs the loan was meant to address. Working capital loans have a 7-year repayment period, while it takes ten years to repay equipment loans. Commercial real estate credit facilities are repaid in 25 years.
SBA 504/CDC Loans
Fixed rates and higher loan amounts are the options offered in SBA 504 loans. These loans are more easily accessible as the package is a combination of funds from banks and the non-profit community development corporation (CDC). It is thanks to this combination that the loan packages become long-term financing options as well as low-interest loans.
SBA 504 loans are project-specific. They are only offered to fund specified business projects such as the purchase of fixed assets that include, heavy equipment and commercial real estate. That is why these loans provide financing to the tune of $20M at an interest rate of between 5 to 6 percent. Additional fees of 3 percent of the loan value will feature in the loan package. Furthermore, the loan’s repayment period is anywhere between 10 to 20 years.
How You Can Use Hotel Loans
Hotel loans, as seen above, cater for acquisition, construction, refinancing, and expansion needs. These needs create the terms of each agreement. These terms vary depending on the purpose agreed upon in the loan. There are six potential reasons for seeking a hotel loan, and they are the basis of the six potential loan agreements.
Buying an already established hotel requires substantial capital funding. Most financial institutions fund such undertakings to the tune of 65 percent LTV (Loan-to-value) ratio. Sixty-five percent LTV ratio may be the average financing rate. However, some institutions offer to finance an acquisition project to the tune of 80 to 90 percent. Most lenders prefer acquisitions of chain hotels or popular brands as opposed to purchasing independent hotels or stand-alone motels.
Conventional bank loans are ideal for hotel acquisition projects. However, you will need to have a sizeable collateral that matches the sums in the loan request. If you have such security and with a good relationship with the bank, this loan will be ideal for such a project.
SBA loans can fund acquisition projects. The acquisition price dictates what credit to access. If the venture costs an amount under $5M, you can obtain the SBA 7(a) loan, with the financing reflecting in your account within 45 to 90 days. SBA 504 loan packages become ideal for those seeking above $5M with a cap of $20M. With SBA loans, you need only wait for 30 days to have the sums for the acquisition.
Refinancing needs stem from cash flow challenges. You may need a capital injection to reorganize your business’ cash flow needs. In most cases, the refinancing packages are taken up to pay off existing loans to free up working capital to finance the daily running of the business.
Depending on the sums you require for a refinancing project, both conventional bank loans and SBA loan packages are options available to you. However, SBA 7(a) loans have certain thresholds you must meet to qualify. It must be clear to the lender that your current loan terms are unreasonable. These terms could be a high-interest rate, a ballooning maturity of the loan, or an interest-only period.
Generally, lenders are interested in the performance of the hotel before approving the loan request. This assessment includes an overview of the hotel’s profitability projections as well as their location, which are aspects (according to the lender) that affect the hotel’s ability to repay the loan sums.
Construction projects are an expensive undertaking, and the most involving of any of the hotel projects you can seek funding for. Brand new ventures do not have a history of their performance, and their profitability projections are not founded on any activities of the business. That is why financiers need convincing when it comes to funding construction projects.
Furthermore, a new hotel will take time before it becomes a reputable brand or for it to achieve profitability. Therefore, in the eyes of lenders, you are more likely to default on your payments. As such, lenders need to be convinced that you will indeed meet your obligations.
In most cases, a majority of hotel owners use the hotel construction loan to finance the setting up of the hotel as well as fund the initial operational costs. The loan also caters for repayments to be made within the first 6 to 9 months after the commencement of the business or as per the terms of the loan agreement. It is advisable to take on construction missions if you have the resources to meet the upfront operational costs.
As much as there are challenges in accessing hotel construction loans, it is not entirely impossible. While several lenders may shy away from hotel construction lending, some will offer the sums you are looking for. Having a viable business plan based on feasibility studies that show a comprehensive plan to have the hotel up and running will be an advantage. It also helps to have strategic partnerships in the venture - these affiliations will be an asset when approaching financiers.
Traditional bank loans and strategic partnerships are more viable for construction undertaking. Banks and other private lenders partner with hotel owners to see the projects actualized. You have more odds at accessing funds through commercial loans rather than the SBA loans because of the following reasons:
- Banks are in the business of offering loans for construction projects. They only need to be convinced of the business concept to approve the loan. Their internal safeguards that are evident in their loan terms further ensure that their interest is secured.
- Private lenders, on the other hand, seek partnerships. Theirs will be investing in a project to which they expect a return on their investment (ROI).
- Real estate investment companies are formed with one particular mandate: Investing in real estate projects. Their capital injection is meant to see construction projects such that of hotels fulfilled. They are the preferred funding sources because their input is not limited to finances. They will have experts in the real estate industry offer advice during the construction process.
Hotel Loans for Furniture, Fixtures, and Equipment (FF&E)
Hotel furniture, fixtures, fittings, and equipment are elaborate and capital intensive. You may require the FF&E in your construction project or as a renovation undertaking, or it is part of the re-branding strategy. Whatever the reason, you can seek financial aid to complete these projects.
Equipment loans under the FF&E package are specific to the acquisition, replacement, or the addition of hotel equipment. You can only use these funds for equipment-related activities. Equipment loans are carefully monitored by financiers, whether commercial loan financiers or the SBA lenders. Any presence of an equipment loan in your books complicates your access to funding. Most lenders will require you to pay off the loan before they approve of the sums you apply for.
Some lenders allow for a piece of equipment to serve as collateral in the funding you seek. This makes it easier to access financing from commercial lenders. You too have the option of leasing the equipment. It makes the purchasing of the equipment easier with the purchase cost spread over several months.
When seeking FF&E financing, equipment loans, and business credit options are your best funding sources. Equipment loans are ideal for equipment that will be in use in the long run while business credit lines meet the costs incidental to small equipment needs or running expenses for your equipment.
Hotel Franchise Loans
Franchises have proven to be one of the most profitable business models for franchise owners and franchise investors. The success of this model is what financiers consider when funding loan requests. Applying for a franchise loan is arguably one of the most accessible hotel loans. Lenders bank on the success of the brand to substantiate the profit projections you attach to your loan request.
Franchise owners can point you to lenders who can offer a franchise loan. These lenders are familiar with the franchise’s operational model as well as its profitability. The understanding of the franchise is a guarantee that you will honor the loan in full and in the agreed time in the loan agreement. Some of these lenders may have tailored a franchise-lending program to aid investors acquire or set up franchises.
Franchise funding is easily accessible through conventional bank loans, SBA 7(a) and SBA 504 loans. Traditional bank loans rank top, especially if there is a franchise-lending program with the franchisor. SBA 7(a) loans, on the other hand, are brand and location-specific. A reputable franchise brand, as well as the perfect location, helps ease your access to the funds you seek. Further, you too can request an SBA 504 loan if the loan request is an amount above $5M and not more than $20M.
Franchise loans require an additional document over and above those the lender will request for. You will be required to provide a Comfort Letter signed by the franchisor. The letter, among other things, serves as an assurance that the lender can the franchise unit should you default on your loan.
Alternative Non-Real Estate Loans
Some capital requirements may not be automatically meant for real-estate projects and may not also be for long-term projects. You may require funding to reorganize your working capital structure or to finance a short-term project. Alternative loans are ideal for such projects. They are, however, not suitable for long-term projects owing to the high-interest rates.
Aspects that Affect Your Access to a Hotel Loan
Certain aspects of your business are essential information sources for lenders. These aspects must be satisfactory to a lender if they are to advance a loan to you. These key factors are:
Purchase Price or the Value of the Project
The value or the project or acquisition in buying agreements dictate how much a lender will offer in the loan. The issuance of funding to the tune of 60 to 90 percent financing depending on the loan request is pegged on the total value of the project.
The Value of the Going Concern
The going concern’s value is the assigned value or purchase price of the project over and above the actual base value. In most considerations, the value of the going concern is set at 10 to 20 percent of the total amount or purchase price of the project.
Loan-to-Value Ratio (LTV)
Lenders are particular when it comes to the value of the loan against the value of the project. They are particular, especially in business acquisition loans. Most lenders use the following formula to determine the LTV value in your case.
LTV (%) = Principal Loan Amount/Property Value *100
The LTV value is always given as a percentage. Lenders offer loans to businesses with an LTV of between 85 to 90 percent.
Contact a Reputable Lender Near Me
Funding hotel projects has become easier with hotel loans. The above information shows that established entities and small hotel owners alike can access such funding, and Money Lender Loans in Orange County is here to provide the financing you need for your hotel project. Give us a call today at 949-409-4372 to know more about other lending options available to you.