September 29, 2023
There are roughly 166,000 hotel businesses in the US, and the appeal of the hospitality industry has intensified given the tourism boom and travelers' growing preference for unique lodging experiences. If you are contemplating launching your own hotel or acquiring an existing hotel business, an SBA loan might be a fitting financing solution.
I spent a little over 10 years as the Executive Director of an SBA Loan Fund where we approved nearly 2,000 loans during my tenure. Drawing from that experience and my work at ProjectionHub assisting entrepreneurs to kick-start their ventures or acquire an already operating hotel enterprise. I wanted to delve deeper into how to utilize an SBA loan and I plan to cover:
With that in mind, let’s get started!
Top SBA Lenders for Hotels
If you're looking to invest in the hotel industry, GBank leads as a prominent SBA lender. They've approved 348 loans for hotels, with an average loan amount of $2,627,378. Below, you'll find the top 10 SBA lenders for financing hotel projects based on data from 2018 - 2023.
SBA Lenders for Hotel Acquisitions
For those seeking to acquire hotels through SBA loans, GBank stands out as a leading lender. They've approved 254 loans for hotel acquisitions, with an average loan amount of $2,652,347. Below, you'll find the top 10 SBA lenders for financing hotel acquisitions between 2018 and 2023.
Hotel Construction Loans
For those seeking financing for hotel construction projects, Wallis Bank leads as a prominent lender. They've approved 54 hotel construction loans, with an average loan amount of $3,071,459. Below, you'll find the top 10 lenders for hotel construction loans.
What is an SBA Loan?
An SBA loan is a financial solution supported by the U.S. Small Business Administration (SBA). By guaranteeing a part of the loan to lenders, the SBA enhances the borrower's likelihood of approval, often leading to better terms compared to conventional loans.
In the context of a hotel business, an SBA loan can be used in:
Purchasing Real Estate: If a hotelier wants to buy land to build a new hotel or acquire an existing hotel property, an SBA loan can help finance the purchase.
Construction and Renovations: The costs associated with constructing a new hotel or renovating an existing one can be quite high. An SBA loan can provide the funds needed for such projects.
Refinancing Existing Debt: If a hotel business has existing high-interest loans or multiple debts, an SBA loan can be used to consolidate and refinance that debt, leading to potentially lower interest rates and improved cash flow.
Working Capital: Day-to-day operations in a hotel can have fluctuating expenses. An SBA loan can provide the necessary working capital to cover payroll, purchase inventory (like food and beverages for in-house restaurants or bars), or deal with seasonal downturns.
Equipment Purchase: Hotels require a range of equipment, from kitchen appliances in restaurants to laundry machines or gym equipment. SBA loans can be used to finance these acquisitions.
Franchise Fees: If a business owner is looking to operate a hotel under a franchise, there are often significant fees associated with obtaining and maintaining that franchise. An SBA loan can help cover these costs.
Key SBA Loan Programs that might be relevant to a hotel business include:
7(a) Loan Program: This is the SBA's primary program to help start-up and existing small businesses. It's the most flexible, allowing borrowers to obtain financing for a wide range of purposes, including:
- Working capital
- Equipment and machinery purchase
- Real estate purchase and construction
- Debt refinancing
The 7(a) loan program has several sub-programs, like the SBA Express program, which offers a faster turnaround for loan approvals.
504 Loan Program (CDC/504): This program specifically provides businesses with long-term, fixed-rate financing to acquire major fixed assets for expansion or modernization. It's particularly suited for hotel businesses because:
- It can be used for the purchase of land, including existing buildings.
- It funds building improvements, including street improvements and utilities.
- It's great for constructing new facilities or modernizing, renovating, or converting existing ones.
- A typical 504 loan involves a partnership between a Certified Development Company (CDC), the business owner, and a traditional lender.I
SBA Microloan Program: While the loan amounts are smaller (up to $50,000), the microloan program can be used for working capital, inventory, supplies, and equipment. For a small boutique hotel or bed-and-breakfast, this might be a suitable option for starting or making small-scale improvements.
SBA Disaster Loans: While not strictly for business expansion or renovation, disaster loans become crucial in regions affected by declared disasters (like hurricanes, wildfires, or floods). Hotels, like any other businesses, can be severely impacted by such events. This program provides long-term, low-interest loans to help businesses recover.
SBA Express Bridge Loans: In cases where there's an urgent need for cash (like during sudden downturns or pandemics), this program allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 quickly.
If considering an SBA loan for a hotel business, it's crucial to:
- Understand the specific criteria of each loan category.
- Ensure that the hotel operation aligns with the SBA's definition of a small business.
- Collaborate with a bank or financial institution experienced in SBA loans.
- Present a detailed hotel business plan to showcase the feasibility of the hospitality endeavor.
Lastly, remember that even though the SBA offers a guarantee, borrowers must still provide collateral and bear personal accountability for the loan's repayment.
Can I Get an SBA Loan for a Hotel?
Yes, you can get an SBA loan for a hotel. The U.S. Small Business Administration (SBA) provides various loan programs that are suitable for hoteliers, whether you're looking to start a new hotel, purchase an existing one, renovate facilities, or secure working capital.
Here's what you need to know if you're considering an SBA loan for a hotel:
Eligibility: You need to ensure that your hotel business meets the SBA's eligibility criteria. This typically involves being a for-profit business that operates in the U.S., having invested your own time or money into the business, and meeting the SBA's definition of a "small business."
Loan Types: The two primary SBA loan programs suitable for hotel businesses are:
7(a) Loan Program: Useful for a range of purposes, including purchasing real estate, refinancing existing debt, buying equipment, and securing working capital.
504 Loan Program (CDC/504): Ideal for acquiring major fixed assets, like real estate or large equipment. It provides long-term, fixed-rate financing.
Detailed Business Plan: Lenders will want to see a comprehensive hotel business plan that outlines your vision for the enterprise, projected financials, market research, competitive analysis, and other pertinent information. This plan should demonstrate the viability and profitability of the hotel venture.
Collateral and Personal Guarantee: While the SBA provides a guarantee to the lender, you'll typically need to pledge assets as collateral for the loan. Additionally, anyone owning 20% or more of the business usually must provide a personal guarantee, meaning they're personally responsible for the repayment of the loan if the business defaults.
Work with Experienced Lenders: It's advantageous to work with banks or lending institutions that have experience with SBA loans and understand the unique needs and challenges of the hotel industry.
Loan Terms: Terms can vary depending on the type of loan and its purpose. For instance, real estate loans can have terms up to 25 years, while equipment or working capital loans might have shorter terms.
Down Payment: Depending on the specific loan and lender requirements, you might need to provide a down payment, which can range from 10% to 20% (or possibly more) of the loan amount.
Given the capital-intensive nature of the hotel industry, SBA loans can offer valuable financial support. However, securing an SBA loan requires careful planning and thorough documentation. It's a good idea to consult with financial advisors or professionals experienced in SBA lending to guide you through the process.
Is an SBA Loan a Good Option for a Hotel?
An SBA loan can be a suitable choice for a hotel, depending on the specific requirements and situations of the establishment. Here are some of the pros and cons of using an SBA loan for a hotel:
- Lower Down Payments: Compared to conventional loans, SBA loans often require a smaller down payment, making it easier for business owners to secure financing.
- Favorable Interest Rates: SBA loans tend to have competitive interest rates, often lower than traditional business loans.
- Longer Repayment Terms: Especially relevant for capital-intensive industries like hotels, the extended terms (up to 25 years for real estate) can result in lower monthly payments.
- Access to Capital: For new or smaller hoteliers who might not qualify for traditional financing, the SBA guarantee can make it easier to obtain a loan.
- Comprehensive Use: Funds from SBA loans, especially the 7(a) program, can be used for a variety of purposes, from buying real estate to working capital or equipment.
- Fixed and Variable Rate Options: Depending on the program and lender, hoteliers can often choose between fixed or variable interest rates.
- Personal Guarantee: Owners with a 20% or more stake in the hotel usually need to provide a personal guarantee, which means they're personally liable if the business defaults on the loan.
- Collateral Requirement: Many SBA loans require borrowers to pledge assets as collateral, which could be at risk if the loan isn't repaid.
- Paperwork and Complexity: The application process for SBA loans can be cumbersome, requiring a detailed business plan, financial statements, and other documentation. This can make the approval process longer compared to some other types of loans.
- Size Restrictions: To qualify, the hotel must meet the SBA's definition of a "small business," which may exclude some larger establishments or hotel chains.
- Prepayment Penalties: Some SBA loans may have prepayment penalties if you pay off the loan early, especially in the first few years.
- Fees: SBA loans might come with additional fees, including guarantee fees, which can increase the overall cost of borrowing.
While SBA loans offer numerous benefits for hotel businesses, it's essential to weigh these advantages against the potential drawbacks. Each hotel's needs and circumstances are unique, so consulting with financial professionals or lenders experienced with SBA loans is crucial when considering this financing option.
What is the SBA Loan Application Process for a Hotel?
Obtaining an SBA loan for a hotel involves a series of stages, from initial groundwork to the ultimate release of funds. Here's a sequential breakdown of the SBA loan application process for a hotel:
Research and Choose a Lender:
- Not all banks and financial institutions are sanctioned to provide SBA loans. Begin by pinpointing SBA-endorsed lenders in your vicinity or those experienced in financing hotel ventures.
- Engage with banks you've previously liaised with; they might be more receptive to fund a known client.
Draft a Comprehensive Business Plan:
- An imperative for any SBA loan application. The plan should encapsulate a thorough description of the hotel enterprise, market insights, promotional tactics, management hierarchy, and in-depth hotel financial projections.
- If you're acquiring an existing hotel, include its past financial records.
Compile Necessary Documents:
- Personal background and financial statements for all key stakeholders.
- Financial reports of the hotel if it's already operational.
- Ownership details and affiliations, covering other businesses you might possess or participate in.
- Previous loan application records.
- Tax returns for both individual and business purposes.
- Curriculum vitae of all primary business stakeholders.
- Business lease documents, if relevant.
Fill Out the SBA Loan Application:
- This constitutes the official document you'll complete to seek the loan. The lending institution will supply the necessary paperwork. The main document is the SBA Form 1919, titled Borrower Information Form.
- A majority of SBA loans necessitate collateral, which might encompass business-related or personal assets. Ensure you have paperwork ready for these assets.
Review and Negotiation:
- After submission, the lender evaluates all provided materials. They might revert with inquiries, additional documentation requests, or seek clarifications.
- Upon lender validation, the application advances to the SBA for their endorsement.
- The SBA meticulously assesses the application and the lender's judgment. Duration hinges on the loan's magnitude and category.
- Following SBA's nod, they furnish a guarantee, enabling the lender to finalize the loan proceedings.
- Post-approval, the concluding phase commences. It involves endorsing loan agreements, rendering any pending documents, and settling terms.
Release of Funds:
- Post closure, the lending entity disburses the funds. The distribution timeline is contingent on the loan's purpose and classification.
Throughout this journey, foster transparent dialogues with your lending party. Each institution might have nuanced prerequisites or workflows; thus, it's essential to proactively grasp and adhere to them.
Hopefully, this overview assists you as you explore an SBA loan for your hotel venture. If you have any questions along the way, don’t hesitate to reach out!