Starting a hotel business is a massive undertaking. There are so many things involved from technology, staffing to hotel brand communication and maintenance—and securing business financing is just one big piece of it. Managing services like front desk, housekeeping, marketing, and sales require capital, which is why financing is so important.
The good news is there are numerous hotel financing options for aspiring hoteliers. The US Small Business Administration’s loan programs serve aspiring business owners like you to catch on SBA hotel loans at competitive rates and terms to help grow your hotel business—making your grand opening possible.
Here is everything you need to know about SBA hotel loans and how can you secure them for your business. First, let’s dive into what an SBA hotel loan is and the different loan types available.
What Is an SBA Hotel Loan?
SBA hotel loans are financing programs offered by the US Small Business Administration’s for building, buying, renovating, purchase, or refinancing a hotel business.
The SBA doesn’t directly lend to businesses, Instead, they partner with a network of lending platforms—including banks, alternative lenders and nonprofits—to guarantee up to 85% of the loan’s proceeds, making funding access easier for borrowers.
This arrangement permits lenders to approve quick funding for borrowers that may not otherwise able to secure capital due to the high risk involved in small business lending.
Types of SBA Hotel Loans
Though, the US Small Business Administration doesn’t offer any specific hotel financing, but SBA’s two most popular loan programs—the 7(a) loan program and the 504 loan program are applicable to cope with the most common financing needs of hotel businesses.
SBA 7(a) Loans
This loan program is the most desirable and ideal funding solution for hotel businesses due to its lower interest rates and flexible repayment terms with cash up to $5 million. The SBA 7(a) loan program can be used to fulfill almost any hotel financing needs such as acquisitions, working capital, renovations, commercial real estate, construction, and more. Here’s an overview of the SBA 7(a) loan program:
- Loan Amounts: Up to $5 Million
- Maximum SBA guaranteed – 85% for loans up to $150,000 and 75% for loans greater than $150,000
- Interest Rates:Maximum of 2.75% + Prime Rate (between 5%-10%)
- Fees: Possible guarantee fee of 0% to 3.5%, based on your loan’s maturity and guaranteed amount
- Repayment Terms: Based on loan types (7 years for working capital loans, 10 years for equipment loans, and 25 years for commercial real estate loans)
- Turnaround Time – 5-10 business days
- Forms – SBA Form 1919 and SBA Form 1920 along with some other SBA Forms
SBA 7(a) Hotel Loan Benefits
- The major benefit is the low down payment of only 10% in some cases
- Because of the SBA guarantee, lenders will be flexible in the underwriting process regarding expertise, cash flow, credit standing, quality of real estate, etc.
- Easy refinancing at 1% prepayment penalty after 2 years and with no penalty after 3 years
- Available for any business purpose including partners buy out, working capital, property renovations, debt consolidation, etc.
- Fully amortization over 25 years with no balloon
SBA 504/CDC Loans
SBA 504 loans are considered complex, but still an attractive option for hotel financing because of fixed interest rates and higher loan amounts.
The SBA 504/CDC Loan is created long-term and low-interest by combining a loan from a non-profit Community Development Corporation (CDC) with a loan from a bank lender. With the assistance of community development relationships, SBA 504 loans are easily available to hotel borrowers. There is a caution with an SBA 504 loan: it can only be used for specific business purposes such as the purchase of long-term, fixed assets for expansion or to refinance large equipment and/or owner-occupied commercial real estate.
- Loan Amounts: Up to $5.5 Million
- Interest Rates: Typically 5% to 6% (below market rate and are fixed for the life of the loan)
- Fees:Roughly 3% of the loan value; can sometimes be financed into the loan repayment plan
- Repayment Terms: 10, 20 or 25 years
- Required Equity: A low down payment of 10% in most cases (conserves your working capital)
SBA 504 Hotel Loan Benefits
- An ideal financing option for hotel construction financing(especially for larger construction projects between $5 million to $20 million) or for high loan to value refinances up to 90%.
- Fixed rates for both the first mortgage (for at least 5 years) and the 2nd mortgage (for at least 25 years)
- A 30-years amortization on the first mortgage
- You can finance multiple hotels via SBA 504 Green program
- It’s competitive, offer fixed-interest rate without any future interest rate fluctuations
- You can refinance existing debt related to fixed assets
- The little down payment of 15% if you are expanding an existing business.
Common Uses for SBA Hotel Loans
The terms of the SBA Hotel loans based on the loan type and the exact nature of projected business deal.
For hotel acquisition, most lenders fund up to 90% of the property value plus any extra asset value for the business. The SBA loan process is length is it advisable to submit the application early on in the negotiation process so as to secure funding before a new buyer jumps in.
For new hotel construction on raw or underutilized land, you can get SBA 7(a) for up to 80% to 85% of estimated purchase and construction costs. In this scenario, the borrower should have high personal credit and put up personal collateral, because the lender is investing more than the existing value of the property.
For refinancing, you can get SBA 7(a) loan with terms up to 25 years, allowing additional cash flow for working capital needs. In order to qualify for SBA 7(a) refinancing, you must prove that your existing hotel loan carries absurd terms, like a balloon maturity, an excessive interest, or an interest-only period. These terms can be complicated to circumnavigate and are often calculated individually, so you should interact directly with an approved local 7(a) lender to check your qualification.
How Do SBA Hotel Loans Work?
Regardless of your hotel financing needs, the accessibility and terms of most SBA hotel loans will be based on the following key factors:
- Purchase Price or Property Value
- Going Concern Value
- Loan-to-Value Ratio
- Borrower Injection
- Additional Collateral
Purchase Price or Property Value: The land and building combine represents the majority of fixed assets, and the property value will largely direct the loan amount available. If you’re using SBA hotel loan for an acquisition or purchase of a commercial real estate, the loan amount will typically be 85 to 90% of the real estate purchase price. For refinancing or new construction, the loan amounts will be limited to a maximum of 80-85% of the total property value.
Going Concern Value: The going concern value is value of the business over and above the base property value and it applies mostly to hotel acquisitions. Usually, the going concern value will elucidate a maximum of 10% to 20% of the total purchase price.
Loan-to-Value (LTV) Ratio: Lenders use this ratio to represent the ratio between the principal loan amount and the total value of the property being purchased—usually for commercial real estate or business acquisition loans. Most lenders generally consider a maximum LTV of 85 to 90%, with the accurate LTV reckoning on the borrower’s financial history and inclination to obtain the loan with collateral.
Borrower Injection: Lenders want to see your skin in the game. Which is why they want to have a borrower injection—often called a SBA loan down payment of 10% to 15% of the loan amount. The purchase price of the property includes the loan principal plus the borrower injection for commercial real estate or business acquisition loans. Again, the borrower injection amount on any loan will depends on the borrower’s financial history and the availability of outside collateral.
Additional Collateral: SBA hotel loans are secured by the property itself, being it a major benefit to finance a property purchase or hotel acquisition. Borrowers don’t have to sign any personal guarantee or put up personal collateral. With that said, providing additional collateral can help increases the LTV ratio and lower the borrower injection required upfront, thus lowering the cash requirement.
Steps to Secure SBA Hotel Loans
Here are a few steps you should take to help you go about submitting your SBA loan application and getting funds in hand quickly
1 The first step is to determine your borrowing needs. In order to identify it, you need to understand your property value, how much you can afford and what SBA loan programs suit your needs best.
- Calculate 90% of your property value to conclude the maximum loan amount you’ll likely be approved for.
- Consider how much you can contribute upfront along with affordable monthly payments to conclude whether you can afford a loan equal to your considered property value.
- Deciding which loan option is more suitable to your needs. The selected loan option will govern the intermediary lenders you can work with to some extent. Therefore, you’ll need to make the selection before moving forward with the loan process.
The next step is to validate your qualifications. In conjunction with being a registered business in the US with less than five hundred employees, there are other things that lenders underwriter to determine your qualification for SBA hotel loan. Here are five key things you should ponder on:
- You need to have your property appraisal independently to validate the property value. If the appraisal value is significantly lower than the asking price, you might need to put up collateral or negotiate with the seller to reconcile the difference.
- For hotel acquisition or new construction, your personal credit history is take into consideration as an essential factor into the SBA’s decision. You might get approved at a lower score, but a credit score of m+ is considered good and highly qualified.
- In order to get quick approval for hotel financing, you’ll need to show willingness by contributing upfront cash between 10% to 30% of the total loan amount.
- Although, SBA hotel loans don’t require borrowers to put up collateral, but having additional collateral ready can count in your approval for hotel loans—especially with poor personal credit history.
- You need to have a strategic business plan along with the capability to accomplish it. While having a business plan will not guarantee the approval, still it shows your commitment and demonstrates that you can be trusted with their investment.
The final step in the SBA loan application process is the gathering of arduous and time-consuming paperwork. Here is a list of documents you should collect for SBA as well as for intermediary lenders:
- Driver’s license
- Voided business check
- Bank statements
- Balance sheet
- Profit & loss statements
- Business tax returns
- Property tax returns
- Personal tax returns
- Business plan
- Property listing, purchase agreement, or deed of trust
- Business debt schedule
The Bottom Line
After reading through this, we hope you’re ready to submit your SBA loan application! The only thing left for now is to wait. Even with everything line up perfectly, it’s usual for the SBA to request for some additional documents or information. The key here is to stay patient and address any issues or questions serenely and supportively.