Hotel financing has become very popular these days. New hotel ventures are coming out all the time to offer their services, making it hard to find a new hotel project that does not have at least some form of financing.
New funding sources are being introduced more and more often, making it more accessible for new entrepreneurs. Some of these sources include bank loans, credit cards, and investment capital.
This is no surprise; with the right effort, anyone can start a hotel venture! From building a room rate formula to finding investors or lenders to offering gift certificates as an incentive, there is a lot of room for innovation.
This article will not talk about how to get financing for your new venture, but will discuss some novel ways of offering assistance to new hotel owners. We will also discuss some tips that might help any newly formed company get help.
Hybrid loan structures
A relatively new financing model is the hybrid loan structure. A hybrid loan structure requires less upfront cash but charges a higher interest rate.
The advantage to a hybrid loan structure is that it allows you more control over your finances. With a hybrid loan structure, you can choose to charge down the credit card debt or invest the money into assets that will generate income such as a venture fund or business incubator.
On the downside, if you fail to make required payments, then your debt would rise in cost and possibly reduce your ability to obtain a hotel venture financing. In order to qualify for a hybrid loan structure, you must have at least three months of payments left before interest begins to accrue.
Most banks offer some form of credit card with an embedded card where you do not have to pay fee for embedding the debt into your existing credit cards. You can also contact different banks and ask which one provides hybrids.
Raising money via crowdfunding is a novel way to meet new hotel guests and business owners. You can either create a passive source of income by collecting donations from your existing community or start with a smaller investment and grow from there.
As opposed to traditional venture funding, which requires years of development and operations before final accounting, crowdfunding allows for more immediate access to capital.
In recent years, new hotels have started to offer hospitality services such as dining, shopping, and entertainment. These services are becoming increasingly popular so new hotels can offer good quality products and services at competitive rates.
An equity partnership is a common practice in hotels. In this practice, a guest or someone looking to enter the hospitality industry invest money in your business ownership or business investments together with you.
This investment is referred to as a “investment” instead of a loan because you are only able to get back what you put into the business, not money that was lent out. This arrangement can be useful for new ventures who cannot afford their own debt financing or who would rather hold some of the cash and ownership than spend it.
There are several reasons to participate in an equity partnership. One, very commonly, is that the investor receives rights to benefits and perks in the company such as stock grants or public offerings of stock. Two, when debt is incurred during business operations, investors can utilize partner bank loans which are tied into their holdings.
Tax credits it|6) Federal grants
The federal government provides several ways to finance a hotel project. You can utilize a public funding source such as the Hotel Origin (formerly The Plaza at Times Squared), or you can utilize a private funding source such as debt or equity financing.
Since there are so many, we do not cover all of them in this article. However, the ones that apply to new hotels are listed below. All of these sources have different criteria that must be met, so you must do research and find one that best fits your project.
While these sources do not give you any guarantees, they can save you money in the long run compared to going through a bank or borrowing from family and friends.
You also have the option of working with another business if your new to financing projects. There are professionals who assist in obtaining these sources.
A bank loan is the most common financing source for new hotel ventures. Most banks will let you file a bank loan application and give you enough time to gather your materials and submit it by the end of the year.
Most bank loans have a minimum amount of ownership involvement required, so be aware of that. Also, depending on your venture’s size, some banks will limit the amount of equity invested in the hotel.
The total amount of debt must match the property value to qualify for a bank loan. Once it does, there are two ways to obtain the loan. The first is as an owner, which means taking on more debt, but then there is always someone willing to buy it out from under you!
The second way to get a bank loan is as an investment entity.
Mezzanine capital is a new tool introduced in recent years that can be used as a source of equity or mezzanine capital for new hotel ventures. Mezzanine capital is typically less than half the cost of financing through a bank or through an investor, but can be useful if your venture does not require complete debt financing.
If you have limited funds to work with, mezzanine capital may be the way to go. Mezzanine capital is usually raised via an initial public offering or spinoff, so if you are not yet registered with the SEC, you are out of luck.
However, if you do have registration with the SEC, mezzanine capital may be considered “grey” because it is considered acceptable non-financial factors such as recognition of opportunity as proof of business idea.
Partnering with a private equity firm
Introducing yourself is an important part of being a hotelier. While the guest-centric nature of the industry creates a communal environment that makes meeting new guests, partners, and investors fun, it can be tricky to do so without putting your business in danger.
With the right partner, you can tap into new revenue sources and spread your brand awareness. A good partner can even help you raise money if you need it.
However, with each partner you agree to work with, there must be a clear plan for parted ways or retirement. Your other partners must know what steps are available to them should one of you need help.
New hotel ventures should think about whether or not they have a enough source of revenue to support themselves. If not, looking into alternative financing solutions such as debt or equity investments can help them reach financial freedom.
Capitalizing on the value of a current property
New hotel ventures can also look to capitalizing on the value of an existing property. Many new hotels are located in heavily traveled areas, making it difficult to obtain capital from internal sources.
These locations make great source material for investors as they gain access to an established property with a high profile and an opportunity for more revenue growth. Additionally, new hotels are typically less profitable than established ones due to new business expansion and financing methods have evolved for them.
Some ways new hotels can capitalize on their properties is by expanding the site or opening a second location. Both of these methods can be risky, however, due to being unable to obtain adequate financing.If you are interested in investing in an emerging market but do not have access to capital, do not worry!There are many ways to finance new hotel ventures and expansion phases.