Despite the tough year the industry has suffered, the international hotel industry is still brimming with potential. As an effective vaccine allows borders to open back up over coming months, tourists are going to be able to indulge again in the thing they’ve missed the most – travel.
Pre-COVID-19, the industry showed significant growth trends, with strong opportunities for luxury and small hotel businesses that offer a truly authentic and unique guest experience. But realizing these opportunities takes more than a good idea and considerable drive – it takes capital.
Read on for some insights into hotel funding strategies.
What is Hotel Financing?
Hotel property financing in its simplest form is the process of gaining sufficient funds to get your business off the ground – most often a mix of equity and debt, but potentially including any number of blended finance options. Successfully raising capital is no easy task, but it can be achieved by the development of a robust and credible business plan and financial model supplemented by a unique brand concept, a targeted marketing plan, feasibility reports and more.
Once all of this has been accomplished, the work of raising funding for your hotel really begins.
What Options are There for Financing My Hotel?
Business Loans for Hotels
Business loans are the most basic funding option for hotels, and can be utilized not only for starting your business, but also expanding it, making upgrades or renovations, or even to cover seasonal fluctuations in demand. Raising financing this way is a demanding and stressful task made more strenuous by the current economic crisis.
Banks and lenders have a more conservative outlook and are more hesitant to fund ventures that fall into certain risk profiles than others. Demands for surety and collateral tend to be high – after all, they look at business propositions purely in terms of the financial return from their loan repayment. They have no interest in your business concept or hotel other than its profitability.
As a result, your business plan will have to be of exceptional quality and detail, outlining your vision as well as projections of when you expect to break even, forecasted occupancy levels and startup costs. Based on this information, lenders will not only decide whether to finance your business or not and how much to lend you, but also the length of time you will be allowed to make repayments before the loan is paid in full.
At the same time, this presents some good opportunities for luxury and small hotels, as they carry less risk due to their lower cost bases. Independent hotels are becoming the destination of choice for travelers over franchised commercial chains as tourists increasingly seek more genuine, different and local experiences. In many ways, independent hotels are outperforming their larger, more established chain counterparts.
A more traditional approach is to pitch your hotel concept and business strategy to private investors who want to expand their portfolios in the hotel and tourism industry. Investors come in all shapes and sizes, from those who just want to see a good and reliable return on their investment to those who want to support their values at the same time.
To win over investors to your business idea, you want the dry but vital numbers, reports and studies to show investors that their money is in good hands, and you want the brand concept and marketing plan to really sell your business idea as something that is unique, interesting and appealing on a more emotional level to your investor base. For example, today’s investors are increasingly interested in doing good with their money while it grows. They want to invest in businesses that support local communities, that benefit the environment and follow a high level of ethical, sustainable values.
An interesting example of this trend in the hotel industry itself is the range of Good Hotels, founded by CEO Marten Dresen. For these investors, a good return isn’t enough on its own, and you should consider incorporating an impact focus into your business. You could become a B-Corp, join 1% for the Planet, or at the very least, build a practical and actionable sustainability plan to ensure you’re positioned within the sustainable and eco-friendly segment of your market.
Larger private investors who have a number of different investments will often have a ‘family office’ setup. In simple terms, this is generally for families with over $100 million in investable assets, who build an investment / wealth management team to deal with the oversight of their investments. The number of family offices globally has risen by 38% in the last two years alone, giving an indication of the industry’s rapid growth.
With an estimated US$2 trillion expected to be passed down from wealthy entrepreneurs to their heirs over the next 15 years, the rise of the family office shows little sign of slowing. The decision making for the use of this capital is also changing hands, so if your project is appealing to a younger generation that is increasingly eager to focus on ESG investments, this could be an avenue worth looking into. The addition of solar panels, LEED certification or other sustainability drivers to your project can be valuable angles to get the attention of this younger generation who are looking to put their own stamp on things.
Family Offices are private by nature, so putting the right advisors and introducers around you is the best way to gain access to them. It can be a slow process, but the time invested can help you develop strong and substantial relationships that yield great dividends over time.
Locally Sourced Investment
When raising hotel investment funds for a smaller venture, you can also afford to look for capital closer to home. Locally sourced investing includes options like borrowing from friends and family, or self-financing – putting your own savings on the table, refinancing or mortgaging your home, or selling your own investments. For many hotel businesses that don’t require considerable funding, this is one of the first avenues to be assessed. It may offer an opportunity to get terms that are more favorable than those offered by traditional lenders and hotel financing companies, and almost certainly carries less detailed due diligence.
If you are entering into agreements with friends and family, it is always a good idea to treat it as professionally as if you were doing so with a bank or private investor – laying out the terms in a proper contract and sticking to them.
The best thing about this option is it allows you to take some pressure off your business in the short term, while you get on your feet. Even if it does not cover your total costs, it may reduce the amount of funding you will need to source through a bank loan, lender or investor, taking some of the pressure off while reducing often-considerable interest rates and costs.
Crowdfunded Hotel Investment
Crowdfunding is the most modern way to raise capital for a venture, allowing anyone, anywhere to contribute capital towards the realization of a venture or idea. It is used for almost any need imaginable, from parents raising money for their child’s medical treatment or companies raising funds to develop video games for their fanbase to funding the development of small businesses, including hotels like the YOTEL in San Francisco in 2015.
There are many different crowdfunding platforms, all with different requirements – but the basics are the same. You create an account, set a target for funding and market your concept to the world. Usually, there are rewards set for investors based on the amount they contribute – holiday packages, gift cards, all-expenses-paid trips – you decide. The funds are held in escrow and awarded when you reach your target. If you don’t reach your target, investors are refunded.
This approach is all about marketing, marketing, marketing – you need to be able to get out there and tell non-traditional investors and everyday people why they should help to fund you. Depending on the scale of your project and its financial needs, crowdfunding can supply part if not all of your hotel financing – but its main benefit is that you get a direct buy-in from your community and potential customers who believe in your vision and want to be part of its journey from the start.
Government Grants for Hotels
Getting government grants for hotels is no easy task, but it is certainly worth investigating as part of your hotel funding strategy. In the COVID-driven economic crisis, governments know that it is more important than ever to support local developments that can bring in money and jobs into the community – and hotels are a major driver of this type of economic growth.
Of course, your business plan will have to target this unique client, showing in detail how your business will support the community and local economy effectively, or even preserve the local heritage. One good example of a hotel funded by a government grant is the Titanic Hotel in Belfast, Northern Ireland, funded by £5million in National Lottery money. While it might not be a traditional route to accessing capital, it’s undoubtedly worth some time and attention.
Things to Consider When Seeking Finance for Your Hotel
The process of securing hotel funding is not a quick or easy one, and it is important to consider bringing on a partner who not only understands the hotel industry and the vision of your business, but also has considerable experience in developing hotel business plans and funding strategies to give you the best opportunities for raising effective funding.
Investment capital can be found from any number of additional sources, from private equity funds to development banks. If you’re interested in learning more, download our whitepaper: “Raising Capital – Practical Advice for Financing Your Hotel Business”
Looking for Help Raising Finance for Your Hotel?
Hospitality Associates International specializes in hotel business development, delivering the expertise, guidance and experience needed to deliver a comprehensive hotel business strategy that showcases the knowledge and insight you need to attract key investors and move forward with your project. If you’re looking to raise capital or restructure, book a consultation call with us today.