If you’re starting a hotel business or expanding an existing one, you already know that you have a massive undertaking on your hands. All of the moving parts within the industry are intimidating to just about everyone—and securing business financing is just one big piece of it. Because, beyond the basics of staffing logistics, design, marketing, and more… how, exactly, will you pay for it all?
In this arena, though, there’s good news for aspiring US-based hoteliers. Through the U.S. Small Business Administration’s loan programs, you might be able to snag an SBA hotel loan. And that means your grand opening (or reopening) might be more accessible than you ever thought possible.
So you can lock down the funding you need and dive back into all the other to-dos on your new business list, here’s what you need to know about obtaining an SBA hotel loan for your business.
What is an SBA hotel loan?
As the name suggests, the term “SBA hotel loans” refers to the financing offered through one of the U.S. Small Business Administration’s various loan programs used for the purpose of building, acquiring, refinancing, or gaining working capital for a hotel business.
Contrary to common misconceptions, the principal funding for SBA loans doesn’t come directly from the small business administration itself. Rather, the SBA works in partnership with approved lending partners—including local and national banks as well as non-bank lenders and nonprofits—to guarantee a portion of the loan’s proceeds in the event that the borrower defaults.
This arrangement allows these lenders to approve funding for small business borrowers who may not otherwise qualify due to the relatively high risk involved in small business lending.
Types of SBA hotel loans
Although the U.S. Small Business Administration doesn’t have specific loan programs tailored to hotel financing, each of the SBA’s two most popular general-purpose SBA loan programs—the 7(a) loan program and the 504 loan program—are well suited to meet the most common funding needs of hotel businesses.
SBA 7(a) loans for hotels
By far the most common SBA loan program, 7(a) loans are ideal for hotel financing because they carry low interest rates, long repayment terms, and are available for up to $5 million. These highly desirable financing products can be used to meet virtually any hotel financing need, including business acquisitions, working capital, commercial real estate, construction, and more.
Loan amounts: Up to $5 Million
Interest rates: Maximum of 2.75% + Prime Rate (typically between 5% to 10%)
Fees: Possible guarantee fee of 0% to 3.5%, based on your loan’s maturity and the dollar amount guaranteed
Repayment terms: Up to 7 years for working capital loans, 10 years for equipment loans, and 25 years for commercial real estate loans
SBA 504/CDC loans for hotels
Despite being one of the most complicated loan products on the market, SBA 504 loans can be attractive options for hotel financing because they carry fixed rates and higher loan amounts. That also makes them highly desirable products.
Here’s how these work: The SBA 504/CDC Loan combines a loan from a non-profit Community Development Corporation (CDC) with a loan from a bank lender to create a long-term, low-interest loan. This unique community development relationship can make 504 loans more easily accessible to hotel borrowers who may otherwise struggle to obtain an SBA hotel loan.
One caveat: the SBA 504 Loan can only be used for select business purposes—most often to purchase fixed assets such as commercial real estate or heavy equipment.
Loan amounts: Up to $5.5 Million
Interest rates: Typically 5% to 6%
Fees: Approximately 3% of loan value; can sometimes be financed into the loan repayment plan
Repayment terms: 10 to 20 years
Common uses for SBA hotel loans
The exact terms of your SBA hotel loan will depend on two factors: the loan program you choose—i.e. 7(a) vs. 504—and the exact nature of your proposed business deal.
For the most part, borrowers in search of SBA hotel loans find themselves in one of four potential arrangements:
Hotel acquisition: Many SBA hotel loan requests are made for the purpose of hotel acquisition, as in the purchase of an existing hotel property. In this situation, the lender would fund up to 90% of the property value plus any over and above asset value for the business.
Keep in mind that the SBA loan approval process can be a long one, so you’ll need to submit your loan application early on in the negotiation process for the acquisition in order to obtain funding before a new buyer shows interest in the property.
New construction: If you need business construction loans for new hotel property on a piece of raw or underutilized land, an SBA 7(a) loan may be available for up to 80% to 85% of estimated purchase and construction costs. Because this scenario would likely involve the lender investing more than the value of the existing property, borrowers for a new construction hotel loan should be prepared to meet high personal credit requirements and put up personal collateral on the loan.
Refinancing: Under certain circumstances, an SBA 7(a) loan can be used to refinance existing hotel loans with a new term of 10 to 25 years, freeing up additional cash flow for working capital needs.
To qualify for 7(a) refinancing, borrowers must prove that their existing hotel loan carries unreasonable terms, such as a balloon maturity, an exorbitant interest rate, or an interest-only period. These terms can be tricky to navigate and are often evaluated on a case-by-case basis, so you should communicate directly with an approved local 7(a) intermediary lender to determine whether your situation qualifies.
How do SBA hotel loans work?
No matter the exact scenario of your hotel financing needs, the availability and terms of most SBA hotel loans will depend on a few key factors:
Real estate value or purchase price: Since the land and building that make up a hotel represent the vast majority of its fixed assets, the value of the real estate will largely dictate the loan amount available. According to Matt Diamond, VP of SBA Lending at Celtic Bank, in the case of an SBA hotel loan for an acquisition or commercial real estate purchase, the loan amount will typically be 85 to 90% of the real estate purchase price. For hotel loans taken out for refinancing or new construction, loan amounts are typically limited to a maximum of 80-85% of the total real estate value.
Going concern value: Applying most often to hotel acquisitions, the going concern value is the dollar amount assigned to the value or purchase price of the business over and above the base real estate value. Again, in most cases, the value of the real estate makes up the large majority of any hotel’s total business worth. Typically, the going concern value will account for a maximum of 10% to 20% of the total purchase price.
Loan-to-value ratio: As the name suggests, the loan-to-value ratio (LTV) is a formula that lenders use—usually in the case of commercial real estate or business acquisition loans—to represent the ratio between the amount of a loan and the total value of the asset being purchased. The ratio is calculated as follows:
Principal loan amount / Property value = ___% LTV
Celtic Bank’s Diamond says that for SBA hotel loans, lenders typically allow for a maximum LTV of 85 to 90%, with the exact LTV depending upon the borrower’s financial history and their ability or willingness to secure the loan with personally held outside collateral.
Borrower injection: Before either the SBA or its intermediary lender can agree to approve funding for your hotel loan, they need to know that you as the borrower are truly committed to the deal and have some skin in the game. To ensure this, SBA hotel loans require a borrower injection—sometimes called an SBA loan down payment—of between 10% and 15% of the loan amount. For commercial real estate or business acquisition loans, the loan amount plus the borrower injection together make up the total purchase price of the property.
Loan principal + Borrower injection = Purchase price
As with the loan-to-value ratio, the exact amount of the borrower injection requirement on any loan will again depend upon the borrower’s financial history and the availability of outside collateral.
Additional collateral: One of the benefits of taking out an SBA hotel loan to finance a property purchase or hotel acquisition is that because the hotel property itself secures the value of the loan, you as the borrower won’t necessarily be required to sign a personal guarantee or offer up your personal real estate as collateral. That said, if you need to minimize the amount of cash (i.e. borrower injection) required up front, providing additional collateral is the primary way to increase the LTV ratio for your funding agreement (and thereby lower the cash requirement).
SBA 7(a) loan for hotel acquisition: An example
Because loans obtained for the purpose of a hotel acquisition represent the vast majority—as much as ⅔ by some estimates—of all SBA hotel loans, this scenario represents the most likely funding situation you will find when applying for hotel financing through the Small Business Administration.
Let’s take a look at some basic terms for a hotel acquisition with a total purchase price of $2 million:
Real estate value: $1,700,000
Going concern: $300,000
Total purchase price: $2,000,000
Bank loan amount (90% LTV): $1,530,000
Borrower injection: $470,000
PLUS closing costs: $57,000
Total borrower injection: $527,000
Factoring the going concern over and above the real estate value, closing costs, and a 90% LTV, this borrower would have a total initial cost of $527,000 (or around 26% of the total purchase price) in order to close the deal.
Keep in mind, however, that calculating a 90% loan-to-value ratio assumes that this borrower has good credit, strong financials, and has offered up personal collateral to help secure the loan.
How to obtain an SBA hotel loan
You know how SBA hotel loans work and why they may or may not be a fit for your own business plan—but how, exactly, do you go about submitting a loan application and getting funds in hand for your hotel?
Unfortunately, the SBA loan underwriting process is not for the faint of heart. Here are the steps you’ll need to take if you decide to apply for an SBA hotel loan:
1. Identify your borrowing needs.
The path to approval for any SBA hotel loan starts first with knowing what you need, particularly as it relates to a few key questions:
What is the property value? Calculate 90% of this figure to determine the maximum loan amount that the SBA is likely to approve.
How much funding can you afford? Consider both the amount of cash you have to contribute up front and the size loan payments you’re comfortable maintaining from month to month to determine whether you can afford a loan equivalent to the property you’re considering.
Which SBA loan program is right for your needs? Based on the amount of funding you need and the purpose of your SBA hotel loan, does a 7(a) loan or a 504 loan make the most sense for you? Keep in mind that the loan program you choose will to some extent dictate which intermediary lenders you can work with, so you’ll need to make this selection before moving further into the process.
Once you’ve answered these critical questions, you can use the SBA’s lender match tool or work within an online lender marketplace to identify an appropriate SBA intermediary lender for your funding application.
2. Confirm your qualifications.
In addition to the basic requirements being a registered business of fewer than five hundred employees operating in the United States, you should expect that underwriters will consider these five factors as they determine whether to approve your SBA hotel loan application:
Property appraisal: Even if you’re seeking a loan for a hotel acquisition based upon a listed purchase price, most intermediary lenders will require an independent property appraisal to confirm the value of the property. Should the lender’s appraisal be valued significantly below the asking price, you might need to either negotiate with the seller or put in additional personal capital to make up the difference.
Personal credit history: Particularly with a hotel acquisition or new construction, where you don’t have an existing business with credit and revenue history to share, your personal credit history as the borrower will weigh heavily into the SBA’s decision. Although it’s possible to be approved with a lower score, most successful SBA loan applicants carry a FICO personal credit score of at least 650, generally closer to 680.
Cash injection: To be approved for hotel financing through the SBA, you’ll first need to show readiness to contribute between 10% to 30% of the total loan principal as cash up front.
Availability of collateral: SBA hotel loans don’t necessarily require that the borrower put up outside collateral. All the same, showing that you have access to collateral could still make the difference in your approval for financing—especially if your personal credit history is less than stellar.
Business plan: Lenders also know that even the most financially prudent business deals can go south if the business owner doesn’t have a thoughtful plan and the expertise to carry it out. That’s why, even though a strong business plan in itself won’t guarantee you access to an SBA hotel loan, it’s critical that you have this document in place to show your lender that you can be trusted with their investment.
3. Gather the necessary documentation.
Even if you’re feeling optimistic about your chances of approval for an SBA hotel loan, you should prepare yourself for an arduous and time-consuming application process.
Here’s a brief starting list of the documents you can expect to provide for both the Small Business Administration and the individual intermediary lender who will be funding your loan:
Voided business check
Profit & loss statements
Business tax returns
Property tax returns
Personal tax returns
Property listing, purchase agreement, or deed of trust
Business debt schedule
Although these documents can serve as a starting point to help you prepare your application, this is by no means an exhaustive list. Any SBA loan application tends to come with a relatively long process compared to other business loans, and that’s especially true for loan agreements involving major commercial real estate.
For best results, communicate directly with your intermediary lender long before you intend to submit an application to learn of any unique requirements they may hold.
Submit your application, and you might just be on your way to an SBA hotel loan
You’ve poured over the lender’s application requirements, double-checked every piece of paperwork, and checked every box on the list. Congratulations, you are ready to submit your SBA loan application!
Now, all there’s left to do is wait. And wait. And possibly jump through some additional hurdles and red tape. Even with everything perfectly completed, it’s not uncommon for the SBA to circle back with an applicant once or even several times to request additional paperwork or information. Plan to be available throughout the approval process for any questions that may arise—and if an issue does come up, address it calmly and helpfully.
You’ve done your part, and now it’s simply a matter of waiting on that key decision regarding the future of your hotel business.
Are Small-Business Loans Installment or Revolving?
A small-business loan provides funds to purchase supplies, expand your business and more. This type of funding can be either installment or revolving. Reviewing the credit terms of your loan offer will help you determine whether you’re being offered an installment loan or revolving credit.
Both types of loans can be found in the Small Business Administration, or SBA, loan program and at banks, credit unions and online lenders. While each can provide much-needed funding for your business, there are some key differences to keep in mind.
Installment loans vs. revolving credit
Installment loans provide a lump sum of money
An installment loan is a credit agreement where the borrower receives a specific amount of money at one time and then repays the lender a set amount at regular intervals over a fixed period of time. Typically, each payment includes a portion for interest and another amount to pay down the principal balance.
Business term loan is another common name for this type of loan. After the loan is paid off, the borrower typically must apply for a new loan if additional funds are needed.
Revolving credit provides flexible funds
A revolving loan is a credit agreement where the borrower can withdraw money as needed up to a preset limit and then repays the lender a portion of the balance at regular intervals. Each payment is based on the current balance, interest charges and applicable fees, if any. You pay interest only on the funds that you use — not the maximum limit.
A business line of credit is a common type of revolving credit. Revolving credit gives the borrower flexibility in determining when to withdraw money and how much. As long as the credit balance remains within the preset limit and you continue to make timely payments, you can continue to draw from the line again and again.
Differences between installment loans and revolving credit
The terms of a loan can vary depending on the type of loan, lender and your business’s credentials. Your loan may be a unique combination of terms. However, the following are some common differences between installment and revolving loan programs.
Withdraw as needed.
Minimum amount based on balance and interest with option to pay more.
Based on loan amount.
Based on current balance, not maximum loan limit.
Ability to renew
Not renewable, typically.
When to use an installment loan
Set loan amount is needed
If you’re confident in the loan amount you need, then an installment loan may be the right fit, especially if you need the money in a lump sum. For example, if you’re using the funds to make a one-time purchase, you’ll likely want an installment loan.
Long-term financing needs
Some term loans can offer you more time for repayment when compared with revolving credit. When you stretch your payments out over a longer period of time, it can mean a lower monthly payment. However, that trade-off typically means you’ll pay more in interest costs over the life of the loan.
Larger funding needs
If you’re looking to purchase property, equipment or other large-ticket items, there are a number of installment loans that can be used for this purpose. Revolving credit limits are often less than term loan maximums.
Preference for predictable payments
With a set monthly payment amount, it can be easier to budget for an installment loan compared with a revolving loan, where the payment varies depending on how much of the credit line you use.
When to use a revolving loan
Short-term financing needs
Revolving credit can be good to handle short-term cash shortages or to cover unexpected expenses. Some businesses use lines of credit as an emergency fund of sorts since they’ll pay interest only on the funds they use.
Fluctuations in cash flow
Businesses that experience major fluctuations in their cash flows may benefit from revolving credit. For example, seasonal businesses that don’t have consistent revenue throughout the year can use lines of credit to cover operational costs during their slow season.
Preference for flexible loan amount and payments
If you don’t know exactly how much money you need, then revolving credit will give you the option to qualify for a maximum amount but only withdraw funds as you need them. This way, you’ll pay interest only on the current amount owed.
Compare small-business loans
To see and compare loan options, check out NerdWallet’s list of best small-business loans. Our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.
Advantages and Disadvantages of a Business Bank Loan
According to the Federal Reserve’s 2021 Small Business Credit Survey, banks remain the most common source of credit for small businesses — compared with options such as online lenders, community development financial institutions or credit unions.
You can use a business bank loan for a variety of purposes: working capital, real estate acquisition, equipment purchase or business expansion. To qualify for one of these small-business loans, however, you’ll likely need excellent credit and several years in business.
Before applying for a business loan from a bank, consider the following advantages and disadvantages.
Advantages of business bank loans
Flexible use of funds
Banks offer a range of different business loan products, including term loans, business lines of credit, equipment financing and commercial real estate loans, among other options. Unless you opt for a product that has a specific use case, like a business auto loan, for example, you can generally use a bank loan in a variety of ways to grow and expand your business.
When you submit your loan application, the bank may ask you to identify a purpose for the financing to evaluate the risk of lending to your business. Once you’re approved, however, the bank is unlikely to interfere if you change your intentions, as long as you make your payments. This flexibility is perhaps one of the biggest advantages when comparing debt versus equity financing.
Large loan amounts and competitive repayment terms
Bank loans are often available in amounts up to $1 million or more. Many online lenders, on the other hand, only offer financing in smaller amounts. Popular online lenders OnDeck and BlueVine, for example, both have maximum loan limits of $250,000.
Business loans from banks also tend to have long terms, up to 25 years in some cases. These loans usually have monthly repayment schedules, as opposed to daily or weekly repayments.
In comparison, online business loans typically have shorter repayment terms, ranging from a few months to a few years. Many of these loans require daily or weekly repayments.
Low interest rates
Banks typically offer small-business loans with the lowest interest rates. According to the most recent data from the Federal Reserve, the average business loan interest rates at banks range from 3.19% to 6.78%.
Although some online lenders can offer competitive rates, you’ll find that their products are generally more expensive than bank loans, with rates that range from 7% to 99%.
The interest rates you receive on a bank loan, or any small-business loan, however, can vary based on a number of factors, such as loan type, amount borrowed and your business’s qualifications, as well as any collateral you provide to back the loan. In general, the stronger your qualifications and the more collateral you can offer, the better rates you’ll be able to receive.
Relationship with a bank lender
Many banks provide ongoing support for their lending customers, such as business credit score tracking or a dedicated relationship manager to work with your business. Most banks also offer other types of financial products, such as business checking accounts, business credit cards and merchant services, if you prefer to use one institution for your financial needs.
Although some alternative lenders offer additional support and services, the Federal Reserve’s 2021 Small Business Credit Survey reports that businesses that receive financing are more satisfied with their experience with small banks (74%) and large banks (60%) compared with online lenders (25%).
Disadvantages of business bank loans
Intensive application process and slow to fund
To apply for a small-business loan from a bank, you’ll need to provide detailed paperwork that may include, but is not limited to, business and personal tax returns, business financial statements, a loan purpose statement, business organization documentation, a personal financial statement form and collateral information. You may have to visit a bank branch and work with a lending representative to complete and submit an application — although some banks offer online applications for certain business loan products.
The entire process, from application to funding, can take anywhere from several days to a few weeks, or even longer, depending on the type of loan and the bank. Some banks will also require you to open a business checking account with them before you can receive funds.
In comparison, alternative lenders typically have streamlined, online application processes that require minimal documentation. Many of these lenders also offer fast business loans — in some cases, funding applications within 24 hours.
Strict eligibility requirements
To qualify for a business loan from a bank, you’ll generally need strong personal credit (often a FICO score of over 700), several years in business and a track record of solid business revenue. Bank of America, for example, requires a minimum annual revenue of $100,000 for unsecured term loans and a minimum annual revenue of $250,000 for secured term loans.
Depending on the bank and the loan type, you may need to provide collateral, such as real estate or equipment, to secure your financing. Most banks will also require you to sign a personal guarantee that holds you personally responsible for the debt in the event that your business can’t pay.
Online lenders, on the other hand, have more flexible qualifications and some will work with startups or businesses with bad credit. To qualify for a business line of credit with Fundbox, for example, you only need six months in business, a credit score of 600 or higher and at least $100,000 in annual revenue.
Although online lenders may still require a personal guarantee, they’re less likely than banks to require physical collateral.
Find and compare small-business loans
Still trying to determine the right way to finance your business? Check out NerdWallet’s list of the best small-business loans for business owners.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.
What Are Typical Small-Business Loan Terms?
Small-business loan terms determine how long a small-business owner has to pay back their borrowed money, plus interest. Typical loan terms, also referred to as repayment terms, can vary from a few months to 25 years — it depends on your lender and the type of business loan.
You and your lender will establish a repayment schedule that shows how much you’ll pay per week or month. While reviewing repayment terms, consider eligibility requirements and annual percentage rates, which take into account interest rates and other fees associated with the loan.
Typical loan terms overview
Up to 10 years.
Up to six years.
Startups and businesses with smaller funding needs.
Up to 25 years.
Small businesses with good credit and available collateral.
Business lines of credit
Up to five years.
Short-term, flexible financing.
A few months.
Cash advances based on unpaid invoices.
Up to 10 years.
Business loan repayment terms
Term loans: Up to 10 years
Small-business term loans provide a lump sum of cash upfront that borrowers pay back over time. Online lenders and traditional banks offer them, and maximum amounts range from $250,000 to $500,000. Term loans fall into either the short-term or long-term category — for example, a long-term loan may have a repayment term of 10 years while a short-term loan from an online lender might only give the borrower from three months to two years to pay it back.
Microloans: Up to six years
Nonprofit, community-driven lenders offer microloans to small-business owners in specific regions and underserved communities. While smaller loan amounts typically mean shorter repayment terms (and this is true for some microloans), SBA microloans have terms of up to six years.
SBA loans: Up to 10 years for working capital and fixed assets; up to 25 years for real estate
SBA loans range anywhere from thousands of dollars to $5 million and generally have low interest rates. The maximum 7(a) loan term for working capital is 10 years, although according to the SBA, seven years is common. Borrowers have up to 25 years to pay off loans used for real estate.
Business lines of credit: Up to five years
With a business line of credit, small businesses pay interest only on the money that they borrow, and funds can be available within days. Some business lines of credit require weekly repayments instead of monthly repayments.
Invoice financing: A few months
Invoice financing provides businesses with a cash advance while they wait on their unpaid invoices. Like a business line of credit, invoice financing is a quick way to access cash and is one of the shortest-term financing options available. Terms mostly depend on how long customers take to pay their invoices.
Equipment financing: Up to 10 years
Equipment financing is used to pay for large equipment purchases, and then that same equipment serves as collateral. Terms vary and usually depend on how long the equipment you’re financing is expected to last.
What is a loan maturity date?
A loan repayment term describes how much time you have to repay the loan, plus interest; you might also hear this referred to as loan maturity. This is not to be confused with the loan maturity date, which is the final day of your repayment term. On the loan maturity date, the entirety of the loan and any extra associated costs should be paid.
What is a prepayment penalty?
Some lenders charge borrowers a fee for paying off their loan ahead of schedule. Typically, this is to offset the lost interest the lender expected to receive over the full term of the loan. For example, SBA borrowers with a 15-year-plus loan term are penalized for prepaying 25% or more of the loan balance within the first three years of their loan term. Check your business loan agreement to see if your lender charges this type of fee.