What are Hotel Loans and How Do They Work?

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May 17, 2021 | Hotel Management | Reading Time: 4 minutes

Whether you are running a hotel business for years and have plans for expansion or you want to put up your own hotel business in the United States, loans can help you fulfill your dreams. But before you consider applying for it, you have to be familiar with how it works so you can make the most out of this financing option.

What is a hotel business loan?

A hotel business loan refers to a financial product category that is intended to help businesses that belong in the hospitality industry. Hotel loans vary in structure and size. There are also different products involved for large hotel chains and smaller hotel businesses. If you are exploring different types of hotel loans, you have to know their ins and outs so you can make an informed decision.

Types of Hotel Financing

It is easy to get confused as there are many types of hotel financing to consider. While making up your mind might be overwhelming, knowing how each type differs from one another will help you weigh your options.

* Please note that these options refer to American hotel businesses.

Mezzanine Financing

This type of hotel business loan combines equity and debt. The lender grants both the money and the loan with interest, provided you exchange these for hotel shares. When compared to traditional loans, mezzanine financing is more flexible.

Not only does it offer more capital than typical financial institutions, but it can also help you expand your cash flow that you can use for future expansion. However, you also have to keep in mind that although it is easier to apply for mezzanine financing, it comes with a higher interest rate.

Standard Hotel Loans

This loan is also referred to as classic loans. It has a fixed interest rate and loan term. Once the lender awards you the money, it needs to be repaid on a monthly basis or depending on what you and your lender have agreed upon. Your payment will cover the loan principal’s portion and its accumulated interest.

It is known as one of the most common types of hotel loans because it is often used for undertaking hotel improvement projects such as hiring extra employees, purchasing hospitality equipment, and renovating.

Permanent Loans

This type of hotel loan is intended for owners who want to build their hotel from scratch. It acts as a hotel construction financing from the start, but once the building is complete, it will be converted into a mortgage. This loan saves you from applying and qualifying for two separate loans. It is a good loan to consider if you do not want to deal with different lenders.

Hotel Bridging Loans

This loan allows hotel owners to fill in the cash gap between taking out a mortgage and obtaining a new asset. Hotel bridging loans are more beneficial if used for putting up a new building.

SBA Hotel Financing

This type of loan is government-backed and intended for small businesses. In the event the hotel owner defaults on payment, the large loan percentage serves as a guarantee. This arrangement reduces the risk while also ensuring interest rates are kept at a minimum. However, qualifying for this loan is quite challenging, especially if your hotel’s financial state is not doing very well.

Preferred Equity

This hotel loan extends credit to the owner in exchange for preferred hotel shares. Common shareholders will be given a lower level of priority than preferred shareholders if the hotel faces bankruptcy. This loan intends to boost your cash flow.

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Purpose of a Hotel Loan

As a general rule, having a higher business credit score and additional documentation is required if you choose government-backed hotel loans. If you apply to a private lender, there will be less paperwork, but you will be asked to present collateral as security. The collateral you will present will depend on the size of your hotel loan. As for the underwriting guidelines, you will need to check the state requirement.

Since a hotel business loan’s primary purpose is to help hotel owners grow their business, here are more reasons why a hotel loan is beneficial.

  • Hiring additional staff
  • Funding operational expenses
  • Putting up a new building
  • Relocating
  • Remodeling
  • Covering a hotel purchase
  • Refinancing an existing hotel
  • Refinancing for the purpose of getting cash out of your property
  • Purchasing new hospitality equipment

How does a Hotel Loan work?

In the US, the process of applying for a hotel loan is simple. First, you have to fill out an application form and wait for the lender’s decision. Once your application has been approved, the money will be paid to your business account. You can use the money for a wide range of purposes to make your hotel stand out. Once your hotel starts to gain traction, you can make repayments to the lending company.

Loanable Amount

When it comes to borrowing money with a hotel loan, the amount varies with different lenders. In most cases, decisions will be based on the size of your hotel, your current cash flow, the number of years your hotel is in operation, the loan’s purpose and much more. Small hotels may be granted $100,000 to $1 million while more established hotel chains can get as much as $50 million worth of financing.

Financing Rates

Like the loanable amount, financing rates will also depend on your application and the lender. Expect to shoulder anywhere between 6.5% to 12% interest rates. If you apply for a hotel loan from a bank, the financing rates might be lower, but you have to meet stricter lending criteria. If you want a fast and easy approval, borrowing from private lenders might also work, but you will need to pay higher interest rates.

Key Takeaway

In pursuing your dreams, the lack of funding should not stand in the way because there are other means you can put those dreams into reality. A hotel business loan is a great option for hotel owners because it provides extra cash so they can survive and thrive in the world of the hotel business.

Be sure to do your own research before making that final decision. Not all lenders can provide you attractive rates and terms so take the time to ask necessary questions so you can choose wisely.

About the author: Krish earned a degree in Psychology but decided to establish a career path in writing. She has substantial experience writing copy for different types of businesses focusing on a wide range of topics including health, digital marketing, business, and personal development. She has also spearheaded a writers’ workshop for high school and college students. Aside from writing, Krish also has a penchant for arts and music.

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