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Complete Guide to Hotel and Hospitality Loans

Complete Guide to Hotel and Hospitality Loans
Lauren Ward

Lauren Ward

Updated April 1, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Starting or expanding a hotel or motel can be an expensive proposition. You may be looking to purchase property, renovate or remodel an existing structure, add a restaurant, hire staff, market your business, and more. Fortunately, there are a number of different types of loans designed specifically for aspiring hoteliers, including conventions loans, acquisition loans, bridge loans, and low-interest SBA loans. Read on to learn how to find the right type of financing for your hospitality business.

What Are Motel and Hotel Loans?

A motel and hotel business loan refers to a type of commercial financing product designed to help businesses in the hospitality industry. These loans can be used for the purposes of building, acquiring, refinancing, or gaining working capital for a hotel, motel, resort, bed & breakfast, or RV park. 

How Do Hotel Loans Work?      

Many types of lenders offer hotel and motel loans, including banks, credit unions, private lenders, and alternative lenders. Bank and government-backed hotel loans typically have stricter lending criteria but charge lower interest rates, while private and alternative lenders tend to offer quick and easy approval, but come with higher financing rates.The precise terms of a hotel loan will depend on the lender and type of loan. Hospitality financing often requires a downpayment of at least 10% to 15% of the loan amount and/or collateral in order to secure the loan. In some cases, the hotel property itself serves as collateral for the loan. There are also financing options that involve giving a company shares in the hotel in exchange for capital. 

Times When a Hotel Loan Can Be a Good Idea

A hotel loan can be a good idea in a variety of situations, Including:
  • The purchase of an existing hotel property
  • New construction
  • Refinancing an existing hotel loan
  • Funding operational expenses
  • Relocating
  • Remodeling
  • Hiring additional staff
  • Purchasing new hospitality equipment
  • Getting hotel bridge financing until permanent financing becomes available
  • Positioning the property for profitability
  • Stabilizing a distressed property

Common Types of Loans for Hotels

Just as there are various kinds of business loans, there are also a variety of hotel and motel loans. Here are some options you may want to consider.

Hotel Construction Loans

If your dream is to build a new hotel or motel, then a hotel construction loan can help get the wheels moving. Loan terms vary lender to lender, but it’s often possible for a construction loan to transition to a hotel commercial loan once the building is complete.  

Hard Money Loans for Hotels

Hard money loans for hotels and motels are not offered by traditional lenders, but instead by individuals or private companies that accept property or an asset as collateral. Hard money loans typically involve minimal paperwork and fast funding, making them ideal if you need to make a hotel purchase happen fairly quickly. However, these loans generally come with higher interest rates than conventional hotel loans and shorter loan terms (often just a few years).

Hotel Bridge Loans

Hotel bridge loans fill in cash gaps between getting a new mortgage and obtaining a new asset or selling an older asset or piece of real estate. Hotel bridge loans are particularly useful when building or acquiring a hotel. They can also be useful as a financial safety net during periods of slow cash flow or while waiting on another lender to close on their financing.

Conventional Loans

Also known as a classic loan, this type of financing is offered by conventional lenders like banks, savings institutions, or credit unions. Conventional loans typically come with a fixed interest rate and set repayment term. They can be used for hotel improvement projects, like buying hospitality equipment, hiring more employees, and hotel renovations. Unlike loans backed by the Small Business Administration (SBA), conventional loans are not insured by the federal government. Consequently, they can be more difficult to qualify for. However, if you have a strong credit score, a conventional loan often comes with low rates and attractive loan terms for borrowers. 

Permanent Loans  

This type of financing is designed for entrepreneurs who want to build a hotel from scratch. Permanent loans typically start out as hotel construction financing then, once the building is complete, get converted into a mortgage. Permanent loans save you from applying and qualifying for two separate loans and working with more than one lender.

Preferred Equity  

With preferred equity financing, a private company extends credit to the hotel owner in exchange for preferred shares in the hotel. This puts the financing company in a priority position for repayment from any cash flow or profit earned from the hotel. Preferred equity financing is often used for securing the last mile of funding a bank didn’t offer for purchasing commercial real estate.Recommended: Your Guide to Peer-to-Peer Business Lending 

Mezzanine

Mezzanine financing is a hybrid of debt and equity financing that gives the lender the right to convert the debt to an equity interest in the hotel in case of default. Mezzanine financing can allow you to achieve goals that require capital beyond what a lender will extend. However, this type of financing typically comes with a higher interest rate than other types of hotel loans.

Fully Amortized

Amortization refers to the amount of principal and interest you pay each month over the life of the loan. Near the beginning of a loan, most of your payment goes toward interest. Over the course of your loan term, the ratio gradually tips the other way until nearly almost your entire payment goes toward paying off the principal. A fully amortized loan is a loan that, if you make every payment on time according to your loan schedule, the loan will be completely paid off by a specific date. 

Acquisition Loans

An acquisition loan is a loan for purchasing a hotel asset or an existing hotel. This type of financing often comes with favorable rates and terms because the asset/business being purchased has tangible value and can be used as collateral for the loan. Acquisition loans must be used within the allotted time period and only for the purpose specified at the time of application. 

No Prepayment Penalties

If a loan states that there aren’t any prepayment penalties, it means that you can pay it off early without incurring any fees. If you think early payoff is a possibility, it can be a good idea to get a loan that offers this repayment benefit. 

SBA Loans for Hotels

SBA hotel loans are loans backed by the U.S. Small Business Administration (SBA). The SBA itself does not provide the financing but, rather, works in partnership with approved lending partners — including local and national banks as well as non-bank lenders and nonprofits — to guarantee a large portion of the loan’s proceeds in the event that the borrower defaults. Because this reduces the risk to the lender, SBA loans offer borrowers low rates and attractive terms. However, the application process is extensive and borrowers must meet fairly strict qualifications in order to get approved.

SBA 7(a)

The most common type of SBA loan, the 7(a) loan can be an excellent choice for hotel financing because it comes with low interest rates, long repayment terms, and loan amounts up to $5 million. An SBA 7(a) loan can be used for a variety of hotel financing needs, including purchasing real estate, working capital, buying hotel equipment, renovation, construction, and more.  

SBA 504/CDC

The SBA 504/CDC loan combines a loan from a non-profit Community Development Corporation (CDC) with a loan from a bank lender to create a long-term, low-interest loan. Because this type of loan is connected with community development, it can be more easily accessible to hotel borrowers who may otherwise struggle to obtain an SBA hotel loan.

Pros and Cons of SBA Loans

Pros and Cons of Hotel Loans

Getting a Hotel Loan

Whatever type of hotel or motel financing you’re looking to get, there are several steps involved in applying for and getting a business loan. Here’s what you need to know.

Finding Out How Much of a Loan and What Kind You Need

The first step in finding a loan is to determine exactly how much financing you need. If you’re purchasing property or an existing hotel, you’ll need to first determine its value. Private lenders may offer 60% to 75% of that value, while SBA lenders will often provide 90% of the value. Consider how much of a downpayment you will be able to come up with, as well as what size loan payments you will be able to make each month. You also need to consider the type of loan you may be able to qualify for. For an SBA loan, you’ll need a strong business or personal credit profile. For a hotel acquisition or new construction, where you don’t have an existing business with credit and revenue history to share, your personal credit history will be a major factor in the SBA’s decision. If you have thin or less-than excellent credit, you may want to consider a hotel loan from a private or alternative lender.

Gathering Important Documents

The documents needed to apply for a hotel loan will depend on the lender and type of loan, but may include the following.Borrower information:
  • Driver’s license
  • Three years of tax returns
  • Most recent mortgage statement for any real estate owned
  • Bank statements
  • Life insurance if there is a cash surrender value
  • IRA/401(k) information
Hotel information:
  • Hotel specifications
    • Number of rooms
    • Amount of floors
    • Number of buildings on property
    • Year built
    • Square footage
    • Building acreage
  • Last mortgage statement
  • Profit and loss balance sheet
  • Three years of tax returns
  • Most recent quality inspection report
  • Latest property improvement plan
  • Copy of all business contracts
  • Capital expenditure
  • Survey report
  • Most recent appraisal
  • Customer occupancy rate

Comparing Lenders and Rates

When comparing lenders and their rates, make sure to pay attention to not only a company’s interest rates but also its fees. The easiest way to compare loans apples to apples is to look at the loans' annual percentage rate (APR), which includes the loan interest rate, plus all fees associated with your loan, including origination fees and interest. There are many websites where you can compare different types of hotel loans from different providers.

Applying

Before you jump in and make your dream of owning your own hotel a reality, make sure you have everything in place before you begin. Selecting a business structure, for example, should be done well in advance of applying for any business loan, particularly if your goal is to keep your personal assets protected. In addition to gathering all the necessary documents, you will also likely need to create a business plan, and also provide a hotel loan request letter in which you specify the loan amount you’re asking for and describe how you’ll use the funds. When filling out a loan application, be sure to follow the loan application directions to the letter to avoid delays.

Comparing Hotel Loan Rates with Lantern

If you’re looking to buy or expand a hotel or other type of hospitality business, lack of funding shouldn’t stand in your way. Finding the right hotel or motel loan at the right price, however, can take a fair amount of time and legwork. One way to simplify the process is to use an online loan search platform. With Lantern by Sofi’s loan comparison tool, for example, you can get access to multiple financing options matched to your needs and qualifications with just one application. 
Photo credit: iStock/Lco - Julia AmaralThe tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0122020

Frequently Asked Questions

Can you get a loan to open a hotel?
What is the down payment required for a hotel?
What is a hospitality loan?

About the Author

Lauren Ward

Lauren Ward

Lauren Ward is a personal finance expert with nearly a decade of experience writing online content. Her work has appeared on websites such as MSN, Time, and Bankrate. Lauren writes on a variety of personal finance topics for SoFi, including credit and banking.
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