Hospitality Business Loans

What are the different types of hospitality financing?

The hospitality financing options available to you are:

Term Loans: this is the traditional form of loan we described above, where you borrow a lump sum and pay it back over a short, medium, or long term. This can be as short as 3 months or as long as 10 years, or longer if it’s being used for real estate. This is the most popular form of financing to choose if you’re not looking to purchase exclusively real estate or equipment. There are now many online and alternative lenders that offer term loans with fast funding times, though they can come at the cost of higher rates.

SBA Loans: SBA loans are popular because they are guaranteed by the Small Business Administration, which makes lenders more willing to lend and offer better rates. That said, they’re not always easy to get - you’ll need a good personal credit history and at least 2 years in business to be considered. The SBA offers 3 types of loans which may be suitable for your business: the 7(a) loan, the 504 loan, and Microloans. The 7(a) loan is the most popular choice, with long repayment periods (up to 10 years) and interest rates locked in below 13%. The maximum you can borrow is $5 million.

You’ll usually need a down payment to secure this type of loan, and may need to offer personal collateral. The 504 loan can be used exclusively for real estate and large assets, which can be particularly useful for hospitality businesses, but there are stringent requirements that may exclude you from getting this loan, so read the requirements.

SBA Microloans may be suitable if you need to borrow less than $50,000 and are in a minority or underserved group (this includes women). The downside of any SBA loan is your business must be relatively small (generally not worth more than $15 million) and the application process can take a long time - as long as 12 weeks.

Bank Loans: Bank loans are generally term loans but they are the most difficult form to get. That said, if you have a good financial history, excellent credit score, and are in a strong financial position you may be able to secure a bank loan with an extremely low interest rate (generally 2-5%).

Equipment Financing: If you need to borrow to purchase equipment exclusively, an equipment loan can be a smart choice. This form of loan is secured against the equipment which often helps you achieve better rates and terms.

Business Line of Credit: If you would prefer a revolving line of credit (like a credit card) over a lump sum loan, a business line of credit can help you manage cash flow and borrow flexibly. With this form of financing, you only pay interest on the money you borrow and can use the credit again and again once you’ve paid it back until the line is closed.

Commercial Real Estate Loan: If you’re looking to purchase real estate, a commercial real estate loan (a commercial mortgage) is likely going to be the best option for you, especially if the property you’re interested in is already worth a significant amount. These loans have long terms (typically 15 - 25 years, though you can find much shorter terms) and low interest rates.

What credit score do I need to get a hospitality business loan?

Most forms of hospitality financing will require a credit score of at least 600, with many requiring a score of 660 or higher.

What are the pros and cons of hospitality business loans?

PROS

• Allow you to take advantage of time-limited opportunities
• Hire on seasonal staff for busy periods
• Expand your business or renovate
• Allows you to keep healthy working capital

CONS

• Interest rates can be high
• If you have a low credit score, you may end up with daily payments which may be unsustainable in the current climate if travel was restricted again
• The hospitality industry is currently booming, but you may find that things calm down when international travel becomes easier and your payments may be too high

Hospitality Business Loan Calculator

How to Qualify for Hospitality Financing

To qualify for hospitality financing, you’ll need:

• A credit score over 600 (for most loans)
• Healthy cash flow and revenue
• Healthy debt service coverage ratio (essentially how much debt you currently have compared to your annual operating income)
• A good loan-to-value ratio for real estate and equipment (the lender wants to see that they’ll easily recoup losses if they have to seize the asset and sell it)
• Annual revenue of $100,000 or more

How to apply for a hospitality business loan

Once you’ve decided that a hospitality business loan is right for you, it’s time to compare loans to find the one that offers the best rates and terms for you. Once you’ve chosen one that’s right for you and your business, all you need to do is click apply. Most lenders have a straightforward online application process that takes minimal time to complete.

Compare rates and apply

Once you’ve decided to use hospitality financing, the most important step is to compare rates. The interest rate you get will dictate how affordable you find the loan to pay back, so try to get the lowest rate you are qualified for. When you find the one you want to apply for, simply click apply and follow their instructions. You’ll soon have the funding you need to make that next big move in your hospitality business.