What is hotel financing?
Hotel financing is the process of acquiring funds to operate a hotel. There may be a number of different reasons for seeking financing but ultimately it’s about raising money from external sources to achieve your goal.
Gaining capital is important for any business investment and, given their multifaceted nature, hotels are no different. You need to be sure your finances are in order before embarking on a large scale hotel project.
In this blog we’ll tell you everything you need to know about hotel financing and how to get funding for your business.
Table of contents
Hotel investment: Is it profitable to invest in a hotel?
Hotel investment is not a home run to profit. Just like any business investment, there are potential risks and pitfalls if it’s not managed well – and sometimes plain bad luck plays a part (like COVID-19).
However, the hotel sector can be lucrative. Post-pandemic, the industry is recovering well and there is still plenty of potential for growth moving forward. In 2022, 1,842 new hotels opened. This figure is forecast to grow in the following years to 2,480 global hotel openings in 2023 and 2,707 in 2024.
If you have the right combination of price, location, services, and strategy you can certainly run a profitable hotel business.
How does hotel funding work?
Hotel funding can take a few different forms and will depend on the approach you’re taking.
You might be:
- Refinancing your existing hotel
- Renovating your existing hotel
- Acquiring a hotel
- Building a new hotel
All of these options will require different levels of funding and may need to come from a variety of sources.
Generally though, when you receive money from a lender, the loan will involve aspects of business loans and real estate loans. On this basis, it will typically be approved in the way of a commercial real estate loan.
How to get funding for a hotel
Before you get funding for your hotel, it’s a good idea to have a solid business plan in place. This will help you and lenders understand what you need, and what the desired outcome is. It will also help you when you write a proposal or meet with potential investors or lenders.
Your business plan should include:
- A rough forecast for the expected financial performance of the hotel
- Your objectives, the team involved, and your strategy for success
- Industry and competitor analysis
- How much capital you’ll need
- The potential return on investment
- And more!
The more detailed, precise, and focused you can be with your business plan, the more likely it is that potential investors will be interested in it. If they can’t clearly see how they will get their money back and more, they will probably walk away.
What are your options when it comes to hotel financing lenders?
There are a surprising number of options available for financing your hotel. Some lenders are public, private, or government funded.
The type of lender that proves right for you will likely depend on the specifics of your project.
List of hotel investment partners and sources
Here’s a full list of potential lenders:
- Banks – Naturally banks are one of the most common sources of funding and handle small and large scale hotel loans.
- Private lenders – Investors who are looking to expand their portfolio are a good option, especially if you are launching a new hotel.
- Crowdfunding – If your project is for charity, is unique, or has a particularly important mission, then crowdfunding is certainly an option. It can be effective too, if you market it well.
- Government funding – While it may not be easy, there are situations where you could get a government grant for your project, or get aid due you being an entrepreneur.
- Self-financing – Not everything has to be outsourced. You also have the option of using your own assets and funds to finance a new project, as well as borrowing from supporters such as friends and family. You may not realise the full potential of your own finances and can work with professionals to optimise this before seeking a loan.
- Wealth management companies – Particularly large investors who have investments in a number of different areas will often hire wealth management teams to handle their money, and this may include new investments.
Alternative hotel funding sources: All the types of loans
Even a small hotel project or development might need multiple types of funding or loans.
Here are some examples of hotel loans:
- Commercial mortgages – This is a long-term loan that will cover the bulk of your initial capital, and be paid back slowly.
- Bridging loans – Designed as a short-term loan to ‘bridge’ a gap in your funding and get you over the line.
- Asset and equipment financing – Your hotel is going to need materials, equipment, and assets when it’s up and running. You can get financial support for these too.
- SBA – This is a small business loan from a bank to help small operators get up and running (specifically for the US)
- Tax loans – Tax loans can help ease the strain on cash flow, especially if your hotel is seasonal and tax bills crunch you at low periods of the year.
- Cash advances – Another cash flow aid is a merchant cash advance, which allows you to get money up front and repay it via customer transactions. This means you repay the money when you have it.
What all this can add up to in some cases is jigsaw funding – a combination of several types of financing that are all working towards a common goal.
Wherever your funding comes from, there are a few other key considerations you need to keep in mind.
Best practices for financing a hotel
Following best practices for financing your hotel will go a long way to making the process easier and more successful.
Here are a few rules to abide by:
- Create a watertight business plan – We mentioned this already but it’s important to have a clear vision and mission statement for your business.
- Build as much of your own equity as possible – The more you have before you seek investment or a loan, the more successful you’ll be.
- Seek investment partners that understand the industry – Someone who is experienced in the industry will know what it takes to succeed, and will help make the investment a good one in the long run.
- Research – It’s a good idea to look at case studies that might be similar to yours. Any successful venture is worth taking inspiration and learning from.
- Make your own smart investments – Once your hotel is up and running or you have taken control after acquisition, it’s important you have the right tech in place to make it successful. Use a platform like SiteMinder to help your business thrive online.
How to write a hotel funding proposal or ask for hotel development funding
Writing a hotel funding proposal should be approached in a very similar way to putting together your business plan.
Your proposal needs to be well organised and detailed, but also clear and succinct. Get to the selling point reasonably quickly so potential investors have something to chew on.
In general, your funding proposal should include:
- The nature of the project including what it is and where it is
- The reason why you are seeking funding
- Your vision and mission statement
- Who you are and why you should be supported
- How the project will develop and progress to completion
- How much funding you are seeking
There are a lot of other finer details too, such as the project title, time and date of issuing the proposal, the industry your project falls into, and more.
If it’s your first hotel project or development, it could be a good idea to have a team of experts on-hand to demonstrate to lenders that you understand the risks and have the right people backing your business plan.
Set your hotel up for financial success with SiteMinder’s platform
To make your hotel a long-term success and enjoy the rewards of a profitable business, you need smart technology on your side.
SiteMinder is the world’s leading hotel commerce platform, giving hoteliers everything they need to succeed online.
This means:
- Attracting more guests from all around the world
- Boosting direct bookings
- Making more profit from each individual guest
- Ensuring an outstanding guest experience
- Staying ahead of the competition
- Being more efficient
- Having more control over your business
And most importantly; optimising your payments, cash flow, and overall financial performance with automation, seamless integration, and professional reporting.
Interested to learn more? Take a free trial of the platform today or watch a demo.
