How to Finance a Hotel With Bad Credit
Bad credit may be a barrier to securing hotel finance, but it can be managed and mitigated with the right approach.
Mitigate the impact of bad credit on your hotel finance aspirations with Rangewell.
The hotel industry can be a lucrative opportunity for investors - but in the wake of the COVID-19 pandemic, the industry has been faced with enormous pressure and poor occupancy levels. These pressures have led to many owners struggling with their hotel finances and having to make difficult decisions around staffing, facilities and even the future of their businesses.
Whether you currently own a hotel or a number of them, or you’re thinking about acquiring one, the impact of these hard decisions may go further than you think: your credit rating may have been affected by lending you’ve done during the pandemic.
What is a business credit score?
Bad credit won’t necessarily prevent you from securing the level of finance needed to buy a hotel, but it will make the process more difficult. While many of us are familiar with personal credit ratings, too few business owners understand business credit records.
If you’re a sole trader, lenders will look at your personal credit score when making decisions. As a limited business, however, your corporate entity accrues its own credit history that is mostly impacted by:
- Missed payments: failing to make repayments as a business will impact your credit score.
- Accounts: every UK company must file accounts at the end of the financial year. You’ll also need to submit a Company Tax Return or Corporation Tax with HMRC and Companies House. Supplying full accounts instead of abbreviated ones will improve your business credit score.
- CCJS/insolvency: these issues will significantly hamper your ability to take out business credit as they are hard to resolve and heavily drop your score.
- CRA records: credit record agencies like Experian don’t always have the full picture, but they are the places a lender may turn to influence their decision. With that in mind, you should try to keep your company’s information and data valid and up to date with CRAs. As a hotel owner, you could also ask your suppliers to submit payment records to CRAs to show your successful history of repayments.
- Application volume: submitting a credit application will impact your score, so only progress with one after you’ve done your research and you’re sure you want to go ahead. Submitting too many applications will decrease your credit score as it indicates you may be struggling with finances.
Here at Rangewell, our hotel experts are ready to help regardless of your credit score. We’ve put together this guide to raising hotel finance with poor credit, which you can read through at your leisure.
If you want immediate financial advice, get in touch with our team today for no-obligation advice on finance for the hotel and hospitality sector. We can help you make the right decision BEFORE you apply, which will limit the impact on your credit file.
In this guide, we’ll cover the full process of securing better finance offers from lenders even with bad credit. But before we do, let’s talk about specific issues - because you’re likely in one of three groups:
- Existing owners who need finance for upgrades/expansions/new property: you’ll need a business loan that can accommodate the various works you plan to do. Most decisions will be made against your past performance, which may work in your favour if you’ve got a positive record of running hospitality venues despite your bad credit history.
- New owners looking to buy a hotel: entering the market in the current climate can be challenging due to the slowdown in hospitality and subsequent recovery efforts. However, lenders will still consider well-planned applications that can justify the investment and show good potential for return.
- Owners looking to build a new hotel or convert a property into one: in addition to any potential business loans, you’ll need a construction finance agreement that necessitates a different style of borrowing. Most decisions are influenced by your choice of contractor, business history and capital stack.
Why get finance for your hotel with bad credit?
The old adage “the only way to make money is to spend money” is often true for hotel owners, who may need to invest vital funds in new measures to increase their hotel’s profitability and recoup any losses or debts.
Unfortunately, that means some owners have already taken out loans in the past to get their hotel through hard times - but now face a decision around taking on another debt facility in order to fund something they hope to increase profits. With that in mind, you may be questioning if another loan is worth it - and what investments may best increase profitability. Here are some ideas:
- Improved booking system
If you’re still operating with an outdated booking system, there are a range of great digital tools you can use to help manage guest bookings. Not only will they help organise your hotel’s occupancy rates, but many will also help increase bookings by making it easier for guests to find you and pay digitally.
Expanding your booking system to facilitate an early/late checkout function can also increase overall revenue and is far easier to manage with a digital system than by traditional means. Booking systems can also be used to upsell suites or deluxe rooms, automatically suggesting available rooms when they’re not in use to guests without you having to do any manual selling.
- Hotel renovation or decoration
The majority of hotel finance applications are for the physical upgrades and decorative works that hotel owners perform. These range from decorative tasks such as repainting rooms or resurfacing areas of the hotel through to full renovations that include completely transforming rooms or even converting new rooms from outbuildings. The finance you’ll need to take out depends on the scale of the task.
- Facility upgrades
Guest facilities can easily nudge profit upwards - especially if they increase overall booking chances. Car parking, for example, can be the difference between a guest choosing to stay at your hotel or a competitor. Facilities that improve guest satisfaction, such as spa/pools/bathtubs etc are likewise great for increasing profits but may not be as immediately responsible for securing bookings. Ultimately, you should have a business plan that justifies any potential upgrade based on the type of hotel you run. (A hotel aimed mainly at commuting professionals, for example, will benefit from parking and good breakfast offerings more than hot tubs and wedding halls).
A good marketing service can transform your hotel’s future, but may also ramp up significant bills depending on how you approach it. Whether you work with a marketing agency or invest your own time into paid marketing through a platform like booking.com, many hotel owners look to finance agreements to fund this expensive but potentially rewarding activity.
Commercial mortgages and development finance alike can help you launch a new hotel. Lenders will want to see how the new hotel will generate profit and have a justified business case. Provided you can offer that, bad credit should not be too much of a barrier as the decision is more based on your experience as a hotel owner/hospitality group owner.
When you’re applying for any loan, the lender scrutinises you as a person or business - making a decision based on how likely you are to be able to repay a debt. In hotel finance, this becomes more complex as the lender’s criteria will expand heavily depending on what kind of finance you need. For example, they may agree to a development finance loan to help you build or convert a hotel, but they will need to see a clear business plan and project proposal - and may have influence over your choice of contractor and how the business is sold/run once built.
Mostly, lenders look for specific things when deciding who to lend to - and lots of these are shared across hotel finance borrowers:
Hospitality experience counts for much when you’re applying for a hotel loan - the lender will want to see how you’ve performed as an owner. Having experience in running a hotel gives a lender more confidence when deciding if they will fund your purchase. Even if you’ve never owned a hotel, showing that you’ve been a hotel manager for a length of time will increase your chance of success.
If you’re applying as a business, the lender can assess your shareholders too - especially if one of you has more experience in running hotels than the others. You can use this to your advantage and should be highlighting this type of experience and the skills of your team in your application.
Accounts & forecasts
If you’ve got bad credit and you’re acting as a sole trader, it may be because you’ve defaulted on personal loans or simply have other credit facilities in ‘play’. Despite this, a lender is more likely to base decisions on your business’ accounts than your personal credit score - they want to see that the hotel is a viable business and see evidence that the finance you plan to take out will deliver returns so you can afford repayments.
It's worth bringing a skilled accountant on board to create accurate forecasts as they will help you succeed and can outweigh the impact of bad credit. Remember, if your business has a good record of growth - or even stability, it will count towards a lender’s decision, regardless of your own credit history.
Of course, your business itself may have a poor credit history. There are ways to mitigate this such as improving your filing history with Companies House, asking suppliers to submit records of payment to credit agencies or even registering a new business (though this is only useful in specific scenarios and should be managed by a professional). Ultimately, however, a poor business credit score can be hard to influence if you’ve failed to make repayments - but you can still try and highlight the more favourable aspects of your financial performance and forecasts to lenders.
Occupancy rates & location
Another good way to mitigate bad credit history is to have a hotel with a strong occupancy rate. Being able to show a history of solid guest interest means the lender can see that you can afford repayments. This is particularly useful in the current climate, where many hotels need to secure finance for expansion or refurbishment but may have subpar credit history due to pandemic disruption. In this case, the hotel can show its pre-pandemic occupancy rate history and use this to forecast future numbers.
Every business loan is a balanced risk for the lender, so they’re just as interested in your costs as they are in your forecasts. As a hotel owner, you’ll have a number of overheads that will impact your ability to repay any new finance agreement. These include:
- Cleaning & maintenance
- Marketing budget
- Equipment costs where applicable
- Alcohol licenses, food safety permits and other regulatory costs
Polishing your business plan
All of the above criteria should be included in a business plan. Very few lenders will ever offer finance without a business plan to review. This plan is crucial, as it shows a lender that their investment is a sensible one that will generate enough return for you to meet their repayment schedule.
You can author a business plan yourself, but it’s generally worth the expense to hire an expert to help polish it up - especially for the financial parts. In addition to the elements we’ve just covered (experience, accounts, occupancy and overheads etc), you should make it clear in your plan what you’ll use the finance for; how you’ll accomplish your planned changes, and what your revenue forecasts will be based on the changes you make.
On lending amounts: one of the more crucial aspects of your business plan is that it helps you decide how much credit you actually want to apply for. Over or under-borrowing can both lead to difficulties, so having a strong plan in place that shows how much you need and justifies that amount with forecasts is a helpful resource.
Applying for hotel finance
Once you’ve completed your business plan, you’ll need to review the lending market and approach the lender most suitable for your idea. There are a variety of different lenders and many of them offer different types of financing, all of which depends on what you actually want to achieve and how you’ll structure the package. The main forms of financing for hotel owners are:
A bridging loan is a short-term loan that is generally used when you need immediate finance to facilitate the purchase of a new hotel or to quickly complete renovations, repairs or other works. These loans are offered on short-term, interest-only agreements. Lenders who offer bridging loans will pay close attention to the ‘exit strategy’ - they want to see evidence of how you’ll repay.
While it may seem easier to demonstrate the exit strategy around a new hotel purchase (once bought, it will generate profit), you can also use bridging loans to renovate - in which case the lender will likely look for a commercial remortgage based on the property’s new value once you’ve completed the works.
The short but immediate nature of bridging loans can help in specific circumstances, such as if you need a loan to buy a hotel from a competitor or at auction.
Most hotel owners know that some of their main costs come from the buying and maintenance of assets - including lighting, bedding, electronics in guest rooms etc.
All of these things can be funded through asset finance, which sees the lender reviewing your potential asset acquisitions and making a decision based on the value of those assets and your ability to repay. If you have a poor credit rating, there’s more scrutiny placed on guarantees around surrendering assets etc.
Working capital finance
Working capital finance can be used to raise cash when your hotel’s cash flow is poor - fulfilling short-term needs such as paying salaries and suppliers. You can also potentially negotiate a revolving credit agreement with a lender, which means you have a certain credit limit and can lend as and when you need it - giving you more flexibility.
Merchant cash advances
If you make payment via card, you’ll be able to take advantage of merchant cash advances. A lender can supply you with credit through your card payment system and then repayments are made as a percentage of your guest’s card purchases. This is a good option for those with poor credit as it is a more secure and stable way for the lender to offer funds.
Development finance is its own area that requires significant planning. If you’re aiming to build a new hotel or redevelop an existing property into a hotel, you’ll need to secure development loans. This means lots of research and planning unless you choose to speak to Rangewell sooner so that we can help guide you through what’s required. In short, you’ll need to plan for your capital stack, your intended occupancy, geographic data such as location and footfall, construction plans, competitors in the area and financial projections to justify the build.
These aren’t the only forms of finance available to hotel owners - as many specialist lenders can offer alternatives based on criteria and terms suited to you and your project. If you’re a hotel owner with bad credit, either on your personal file or as a business, the most important step is in understanding that lenders will negotiate on finance arrangements - but you’ll only get the best agreements if you’ve done your research and strengthened your application.
Secure hotel finance now
Speak to our team at Rangewell today for a no-obligation chat about the type of hotel finance available to you. We are independent brokers who know the market and can help direct you to the right lender for your needs. We’ll discuss your credit concerns and then work to build a finance application that gets your hotel the finance you need to accomplish your goals.
Don’t let bad credit stop you from expanding your hotel business. Get in touch now to find out more.