The global hotel business is growing, and travel and tourism are returning after the pandemic. Because of this rise, there is a lot of demand for hotel sites, but it can be hard to get financing.
What is a Hotel Loan?
A hotel loan is a unique business real estate financing used to buy, build, or fix up hotel properties. When compared to regular business loans, hotel loans often have their features and things to think about, like
Repayment based on performance: The hotel may have to repay the loan based on its operating success, such as occupancy rates or revenue per available room (RevPAR).
Higher Leverage: Hotel loans may have higher loan-to-value (LTV) ratios than loans for other business properties, which shows that the hotel could bring in a lot of cash.
Focus on Operating History: Lenders examine the hotel’s operating history, which includes financial records, market research, and the management team’s experience.
Types of Hotel Loans
Bridge Loans are short-term loans used to fill in time gaps in financing, such as when buying a house or fixing it up.
Hard money loans are short-term loans with high interest rates for people with bad credit or assets in challenging markets.
Construction loans are used to pay for building or fixing up a hotel.
Permanent loans are long-term loans used to pay off building loans or give a hotel stable, long-term financing while it is open for business.
Who Needs a Hotel Loan?
First-time buyers are people or groups who are new to the hotel business.
Investors with a lot of experience who want to buy new homes or add to their existing portfolios.
Refinancing Hotel owners who already have debt and want to improve terms, lower interest rates, or get access to more cash.
Benefits of Buying a Hotel in 2025
Demand for Travel: The global travel business is booming again, so more rooms are being booked and paid for.
Rise of Staycations: Both domestic travel and staycations are still on the rise, which is suitable for hotels because they can keep making money.
Potential for Big Returns: Hotels can earn a good return on their investments if they plan and run their businesses well.
Challenges of Financing a Hotel in 2025
Higher Interest Rates: As interest rates rise, borrowing money costs more, affecting hotel purchases’ profitability.
Higher Credit Scores and Stricter Underwriting Rules: Lenders are becoming more careful and have raised their credit score and underwriting rules.
Competition: Because of the higher demand for hotel buildings, there is more competition among borrowers, making it harder to get financing.
This is an introductory look at hotel loans and what will affect hotel investments in 2025.
How to Prepare for a Hotel Loan Application
Develop a Compelling Business Plan
A well-crafted business plan is essential for securing a hotel loan. It demonstrates your understanding of the hospitality market, including:
- Local competition
- Target audience
- Growth potential
Outline your strategies for
- Marketing
- Operations
- Financial management
Conduct a hotel feasibility study to assess the viability of your project.
- Research hospitality market trends to understand the current market conditions and forecast future performance.
Market Analysis
Include a dedicated market analysis section in your business plan. Focus on the specific location and target audience of your hotel. Consider:
- Local demographics
- Tourist attractions
- Existing competition
- Demand for hotel rooms in your area
Financial Projections
Realistic financial projections are crucial for securing a loan. Your forecasts should include:
- Revenue streams (e.g., room rates, occupancy rates, restaurant sales)
- Operating expenses (e.g., payroll, utilities, maintenance)
- Debt service coverage ratio (DSCR): a metric that measures your ability to repay the loan. A DSCR of 1.25 or higher is generally considered favorable by lenders.
Improve Your Credit Score:
A good credit score demonstrates your financial responsibility and increases your chances of loan approval. Aim for a score of 670 or higher. Here are some tips for improving your credit score:
- Pay bills on time and in full.
- Reduce your credit card utilization ratio.
- Dispute any errors on your credit report.
Gather Necessary Documents
Be prepared to submit a comprehensive application package with all required documents. These typically include:
- Business plan
- Personal and business tax returns
- Bank statements
- Property appraisals
- Proof of ownership (if applicable)
- Hotel operating history (if applicable)
Find the Right Lender
There are different types of lenders for hotel loans, each with its requirements and terms. Consider:
- Traditional banks
- Private lenders
- Government-backed loan programs (e.g., SBA 504 loan for hotels)
Research potential lenders and compare their loan products, interest rates, and fees.
Choose a lender with experience financing hotel properties and a good understanding of the hospitality industry.
Following these steps can increase your chances of securing a hotel loan and financing your hospitality venture.
Types of Hotel Loans Available in 2025
Here’s a breakdown of the primary types of hotel loans available in 2025:
Bridge Loans
What they are: Bridge loans, also known as gap financing or interim financing, are short-term loans designed to bridge the gap between the time you acquire a hotel and securing permanent financing.
How they’re used
- Acquisitions: Bridge loans can help you quickly acquire a hotel property before finalizing a long-term loan.
- Renovations: They can provide the necessary funds for renovations before obtaining permanent financing to repay the bridge loan.
Key Characteristics
- Short-term: Typically have shorter terms, usually 6-24 months.
- Higher interest rates: Interest rates are generally higher than traditional long-term loans.
Hard Money Loans
What they are: Hard money loans are short-term, high-interest loans typically provided by private lenders. The property itself often secures them.
Characteristics
- Higher Interest Rates: Interest rates are significantly higher than traditional bank loans.
- Shorter Terms: Typically have shorter repayment terms.
- Less stringent requirements: Easier to qualify for than traditional bank loans, often requiring less documentation.
When they’re suitable
- Distressed properties: Hard money loans can be a good option for financing distressed properties that may not qualify for traditional financing.
- Rapid closings: can be a good option when a quick closing is necessary.
Construction Loans
What they are: Construction loans are used to finance the construction or renovation of a hotel property.
How they work
- Disbursements: Funds are typically disbursed in draws as construction progresses, ensuring that funds are used appropriately.
- Interest-only payments: During construction, borrowers typically only pay interest on the drawn funds.
Types
- Ground-up construction loans: These are used to finance the construction of a new hotel from the ground up.
- Renovation loans: Used to finance the renovation or refurbishment of an existing hotel property.
Permanent Financing
What they are: Permanent financing provides long-term, stable funding for operating hotels.
Types
- CMBS Loans (Commercial Mortgage-Backed Securities): These loans are pooled together and sold as securities in the capital markets.
- Agency Loans: Backed by government-sponsored entities like Fannie Mae and Freddie Mac offer competitive interest rates and longer terms.
Key Characteristics
- Longer terms: Typically have terms of 5-25 years.
- Competitive interest rates: Often offer lower interest rates than shorter-term loans.
Government-Backed Loans
What they are: Government-backed loans offer support and assistance to borrowers, often with more favorable terms than traditional commercial loans.
Examples
- SBA 504 Loans: These loans are beneficial for financing the acquisition and renovation of existing hotels.
- SBA 7(a) Loans: These loans can be used for various purposes, including purchasing existing hotels, constructing new hotels, and refinancing existing debt.
- USDA B&I Loans: These loans are available for businesses in rural areas, including hotels.
Key Characteristics
- Lower interest rates: Often offer lower interest rates than conventional loans.
- Longer repayment terms: You can have longer repayment terms, making them more affordable.
Understanding the different types of hotel loans available can help you make informed decisions about financing your hospitality venture.
The Hotel Loan Application Process
The hotel loan application process typically involves three key stages:
Pre-Application: This initial phase is where you connect with potential lenders to discuss your project and explore preliminary loan options. During this stage, you can:
- Discuss your project goals and financing needs.
- Get pre-qualified for a loan to understand potential terms and interest rates.
- Gather information about different loan products and lender requirements.
Formal Application: Once you’ve chosen a lender, you must submit a formal loan application. This typically involves:
- Completing a detailed loan application form.
- Submitting all required documentation, including your business plan, financial statements, tax returns, and property appraisals.
- Undergoing a thorough underwriting process, the lender assesses your creditworthiness, financial projections, and the property’s value.
Loan Closing: If your loan application is approved, the final stage is the loan closing. This involves:
- Signing the loan agreement and other necessary documents.
- Disbursement of the loan funds.
- Finalizing all legal and administrative aspects of the loan.
It’s important to note that the specific steps and timelines of the hotel loan application process can vary depending on the lender, the loan type, and the project’s complexity.
Conclusion
This blog has discussed the most critical parts of getting a hotel loan. We have discussed the different kinds of hotel loans, such as bridge loans, hard money loans, construction loans, long-term loans, and government-provided choices. We have also discussed the importance of having a good business plan, market research, and financial forecasts when applying for a loan. Lastly, we have stressed the importance of improving your credit score and ensuring you have all the paperwork you need to apply for a loan.
Getting a hotel loan can be difficult. If you want to invest in the hospitality business, contact our team of experienced pros. We can help and guide you through the loan application process, from the first meeting to the loan close. Let us help you achieve your business goals and navigate the complicated world of hotel financing.
FAQs
What is the best type of loan for a first-time hotel buyer?
For first-time buyers, SBA 504 loans or loans from community banks with experience in the hospitality industry can be good options.
How long does it take to get approved for a hotel loan?
The loan approval process can vary significantly. Depending on the lender, the project’s complexity, and your application’s completeness, it can take anywhere from a few weeks to several months.
What is a good DSCR for hotel lenders to generally consider?
A DSCR of 1.25 or higher can vary depending on the lender and the specific loan program.
What credit score is required for a hotel loan?
While requirements vary, lenders generally prefer borrowers with credit scores of 670 or higher.
Can I use a bridge loan to purchase a hotel?”
Yes, bridge loans can be a valuable tool for acquiring a hotel property, especially when you need to close the deal quickly before securing permanent financing.
