How to Finance a Hotel: First-Time Buyers

Buying your first hotel is an intriguing prospect - but one that requires significant financial backing. In addition to your own personal capital, you’ll likely need to raise some form of finance to help make the purchase a reality. 

However, as a first-time buyer, it can be challenging to navigate the lender’s market to find the most suitable products and vendors. Not only do you need to understand what each lender offers and how you’ll repay them, but you’ll also need to know how to put together a successful application so you can actually raise the cash you need. 

If you’ve found a hotel you wish to buy, or you’re still in the research stage, we’ve put together this complete guide to financing your hotel purchase as a new buyer. We’ll cover the main types of finance available, how to build a successful application and even the process of buying and how lenders will get involved in certain elements such as the survey. If you plan on converting a hotel from an existing building, you may also benefit from our guides on property development funding.

If you’d rather take all of the hassles out of the financing process and focus on your purchase, our team can help. We’re experts in hotel finance and will act on your behalf to select the right lenders, tailor your application and arrange for the finance you need to buy your very first hotel and get started in your hospitality ownership career. 

Get in touch now to get started, or read on for the full guide.  

Is it possible to get hotel finance? 

Yes – though you may struggle to find a clear definition of ‘hotel finance’ as a specific package via Google searches. Every type of finance available to lenders in the UK is essentially a ‘product’ that has variable terms and rates based on the lender. Finance can be raised for all sorts of business ventures, including the purchase and even ongoing management of a hotel. However, some people remain confused because there are very few lenders who use the term ‘hotel finance’ in their product offers. 

Instead, most offer general types of finance like commercial mortgages and bridging loans, which can then be used to fund your hotel purchase. Like with any finance agreement, you’ll need some form of deposit and a strong application that shows the lender you have the capability to pay them back. For a first-time buyer, that means that getting hotel finance requires existing capital and extensive preparation in the form of a thorough business plan.

You will also benefit greatly from pre-existing experience in the hotel industry – lenders will want to see management experience in lieu of prior ownership. If you’re buying as an investment, you’ll need to account for this lack of experience by hiring someone with it. 

Do hotel mortgages need a large deposit?

There are different types of finance, but one of the most popular is a commercial mortgage because you can borrow larger amounts. Typically this is around 70% of the property’s value (loan-to-value) - though some lenders may also factor in the hotel’s potential financial performance and value as a business.  

Like a personal mortgage, commercial mortgages require a deposit that will vary depending on the lender and your own circumstances. Unlike standard mortgages, however, deposits are far higher. Most lenders will demand at least a 30% deposit, though this limit and the general terms can change based on: 

• Business performance: a lender will want to see an established business’ performance record, with 2-3 years of accounts so that they can gauge how profitable it has been and how that will affect your repayments. 
• Income projections: past performance is only one type of indicator - lenders also want to see any income or financial projects you’ve done so they can ascertain what value you will add to the hotel. 
• Experience and background: your past history and experience in the hotel sector can influence your deposit and repayment requirements. Significant experience in a senior hotel role will stand you in good stead for your first hotel buying journey. 

If you’re unable to secure a lower deposit, you may need to source finance for the deposit itself or offer personal assets as security. This can take the form of ‘unofficial’ financing from friends or family and is a popular route for first-time business buyers who need additional support. You could also offer your personal home or another valuable asset to the lender as a guarantee.  

Before you consider giving up on your hotel purchase due to not having the right deposit, contact the team at Rangewell. We can help you understand your deposit requirements and options for finance. We may, in some instances, be able to negotiate more suitable terms with the lender and get you the finance you need with a lower deposit. 

First-time hotel buyer business planning

Before you research which type of finance you need, or even consider lenders, you should create a comprehensive business plan. This will be crucial for every type of finance application and will help you strategise your business whilst also giving a lender confidence in you, your business vision and your financial projections. The main areas you need to focus on are: 

1. SWOT analysis: you’ll need to outline the strengths, weaknesses, opportunities and threats to your business. What value will you bring to the hotel post-purchase? How will you ensure your performance remains strong once the current owner leaves? 
2. Business projections: work with an accountant or business expert to create detailed financial forecasts. These will help give a lender an idea of how you’ll repay any finance you take on - though they will likely do their own projections too. 
3. Hotel specifics: you’ll need to outline the hotel’s past performance, occupancy rates, potential guest revenue etc. Factor in the hotel’s location too - as that may be key to demonstrating potential. For example, if you buy a failing hotel in an area with high pedestrian footfall, you may be able to secure far higher booking volumes than the previous owner if you have the experience required. 
4. Your own business structure: you’ll need to showcase your own experience in the hospitality industry, your plans for staffing the hotel and any other potential business structure matters a lender should know about such as any co-directors or plans for expansions and upgrades in the premises itself. 

Types of Hotel Finance in the UK

There are many different forms of finance available for those looking to buy a hotel. The main forms of hotel financing are commercial mortgages, which fund your purchase in exchange for a long-term repayment plan. However, depending on your financial situation, business goals and personal preferences, other finance options such as bridging loans or development finance may be more suitable. 

Using a commercial mortgage to buy a hotel

If you’re buying your first hotel, it’s unlikely you’ve got a history of raising finance for other businesses. However, you are far more likely to be familiar with traditional mortgages - such as the one most people have on their home. Commercial mortgages are similar but built specifically to fund the purchase of the business property. 

Like a standard mortgage, they are long-term and have a steady repayment rate with a relatively stable rate of interest. Lenders offer commercial mortgages secured against the value of the property. In some instances, they may instead offer them against the value of the business. 

Where a homeowner’s mortgage is typically only considered in light of credit rating and salary, a commercial mortgage has more criteria to satisfy such as business experience, working capital, the business you wish to buy’s performance and even its location. 

If you’re buying a hotel for the first time, you need to understand how a commercial mortgage works as it’s a favourable option due to the stability they offer. We have a full guide to commercial mortgages for hotels here on our site, but the main things you need to know are:

• The hotel’s performance is key. Lenders want to see a trading history to assess how successful the investment may be. Occupancy rates are important too - a lender is more inclined to offer finance if a hotel has a strong occupancy rate as it shows you’ll have a stable income and can repay.
• The hotel’s location and property type are important too. Where your hotel is located matters to the lender from two perspectives: risk and potential. A busy city-centre location may potentially offer higher booking rates, but if it’s next to a nightclub or soccer stadium it may have higher risks associated with damage and theft. 
• Your industry experience matters - but there are some things you can do to mitigate being a first-time buyer. While lenders would prefer you to have a history as a successful buyer and operator of hotels, those that offer loans to first-time buyers are instead looking for experience in the sector. That could be in any senior role, particularly in management. The more experience you have, the stronger your application will be. 
• Which type of lender you go with will also affect the mortgage terms. High street banks may offer more stable rates, but will have higher expectations around your experience and business proposition. Specialist commercial mortgage lenders may offer more favourable prospects but at a higher rate. 
• Your deposit is crucial - some lenders want deposits as high as 40% of the property’s value. For many first-time buyers, that means having to either refinance their own homes or even sell them outright to raise the cash capital required to secure more favourable mortgage terms. 

Ultimately, commercial mortgages are an attractive choice for new buyers - but only for experienced hoteliers who have the background and business plan necessary to give the lender confidence in the investment. 

Read our full guide to commercial mortgages for hotels here. 

How can I get the best mortgage rates for my hotel business?

Mortgage rates are dependent on the lender’s criteria and first-time buyers must justify the investment by showcasing industry expertise, business potential and by holding the right deposit. 

One first time buyer strategy that may be beneficial is to create a hybrid financing plan, whereby you raise as much capital as possible for a higher deposit to increase the chance of favourable mortgage terms. If you do this, you need to make sure your repayments are structured in a way that will not hamstring your new business. Our team can help by advising on your finance application and directing you to the right lenders to help you meet your goals. 

Using asset finance to buy a hotel

Asset finance is used to purchase equipment within a hotel, including things like guest room furniture and facilities such as saunas and gyms. Asset finance is typically used to buy from a supplier directly, so you simply list the assets required and your lender can do the rest. Unfortunately, it can’t be used to fund the purchase of a hotel itself - but if you were to own an existing hotel or building that had been newly converted, you may be able to use asset finance to furnish it and get it ready for guests. 

Using a bridging loan to buy a hotel

Bridging loans are designed to offer short-term loans that ‘bridge’ gaps in your finance. In the context of buying a hotel, they may be useful if you were to be offered a time-limited deal on your purchase or you found a hotel to buy at auction. 

A bridging loan is also not under the same scrutiny as a commercial mortgage - so it may be your only route if you were trying to buy a hotel that lenders are likely to offer a mortgage against, such as one that needed significant refurbishment work. 

Whenever time is crucial, bridging loans are generally a good solution that can quickly inject cash flow. You can even use a bridging loan to finance a hotel purchase if your credit rating has dropped significantly, then when you’ve repaid enough to recoup your credit, you could switch to a commercial mortgage or other lending agreement. 

Some bridging loans can be offered with as much as 100% loan to value - though these agreements typically hinge on your experience in the sector and strong credit history. For first-time buyers, it will be far more difficult to achieve that sort of LTV. 

Using development finance to buy a hotel

If you’re considering buying an existing building to convert into a hotel, or you want to build something from scratch, you’ll need a different type of finance altogether. Development finance is specifically tailored to construction projects - with many lenders willing to offer to finance if you can satisfy their criteria. 

What makes development finance different is that it requires a more considered approach from the applicant and a unique set of expectations for the lender. A lender can’t use the past financial performance of the hotel if it doesn’t exist – so they will only fund a development project if they believe it has the potential to repay their investment. To protect themselves, lenders demand certain agreements around your capital structure, meaning they will be the first to be repaid when your property is completed - and if problems occur, they will be the first to begin liquidating your assets to recoup their loan. 

When applying for development finance for a hotel, you’ll need to consider the following: . 

• Planning permission and restrictions

If you don’t have planning permission, a lender is unlikely to bother with your application. Once you have permission granted, your application becomes more viable - especially if it’s not restricted and is in a desirable location. The lender will want to review your planning consent and any restrictions that may apply. For example, if you’re planning to build a hotel in a busy city area but planning restrictions forbid certain facilities, it may limit the hotel’s success and therefore give a lender pause. 

• Breakdown of costs

Every lender wants to understand the proposed financial structure of your project, so they’ll need a breakdown of all costs involved - from planning through to construction, outfititng and even marketing. 

• Development CV

As we’ve mentioned with other types of finance, experience is crucial in hotel loans. When it’s a development project, the lender is also looking at your development CV. Have you already successfully delivered a different development project such as a buy to let home? If you’re new to the world of property development finance, you should secure a partner who can act as an experienced developer to give the lender confidence. 

• Gross development value

You’ll need an estimate of the building’s final gross development value. The lender has no real way to guarantee you’ll run the finished development as a successful hotel. They will therefore lend based on the final property value rather than the business value. 

If you’re planning to build your hotel from the ground up, contact the team at Rangewell to get help on all things property development finance. We’ll get your application ready for lenders and help you understand the ins and outs of funding a development project.  

Using other funding options to buy a hotel

Aside from these main ‘types’ of finance, there are also alternative funding sources available such as family and friend borrowing, angel investing, seed funding etc. However, the most common type you may consider is refinancing existing assets such as your home or second property you currently let to tenants. 

There’s also the opportunity to take out a business loan - but these are generally only for smaller amounts and therefore may not cover your purchase. However, business loans are not secured against your property and are generally planned to offer repayment terms that suit your projected financial performance. If you find a lender who can offer a large enough business loan to cover the purchase of your hotel and you know it will perform well financially, a business loan may be a suitable option. 

Merchant cash advances may also offer some assistance but are more beneficial for existing owners who are experiencing cash flow issues. These loans are advances that are offered on your predicted PDQ machine earnings (debit and credit card payments), delivering short-term cash injections that are then repaid through a percentage cut of every card payment in the hotel.

Can I get hotel finance with a poor credit record?

Raising finance to buy a hotel as a first-time buyer is a challenge, but it’s even more of an uphill battle if you have a bad personal or business credit history. You can still apply for hotel finance with poor credit, but you’ll need assistance from a finance expert like our team here at Rangewell to overcome a lender’s hesitation and maximise your chance of success. 

Luckily we’ve created a full guide to buying a hotel with bad credit for you to review - or you can just get in touch over the phone to get started.