Hotel funding: paying for the refit before the season that pays for it

A hotel's money problem is the calendar. Refits, repairs and brand upgrades have to be done before the busy season, when rooms are empty and cash is lowest. The busy season then pays for them. Funding that ignores that rhythm (fixed payments through the quiet months) is how a full summer still ends in a tight winter.

The cash-flow shape of a hotel

• Seasonal occupancy. Beach, mountain, college-town and business-travel hotels all have different peaks, but almost every property has one. Your own occupancy history is the guide that matters.
• Card-heavy, but not always prompt. Direct bookings settle by card quickly. Bookings through online travel agencies arrive net of commission, on the agency's payout schedule, sometimes after the guest has checked out.
• Large fixed costs. Mortgage, franchise fees, insurance, property taxes and core staff run all year.
• Capex in lumps. Soft goods (beds, linens, carpet) and case goods (furniture) wear out on a cycle. Mechanical systems fail without warning. Branded hotels can also face franchisor-required renovation programs with deadlines attached.
• Pre-season spending. Staffing up, restocking and marketing happen before the revenue arrives.

Which funding fits, and which doesn't

SBA 504 loans finance major fixed assets such as buildings, renovation and long-life equipment, but not working capital or inventory. SBA 7(a) loans can cover real estate, working capital and equipment through a participating lender. For a property owner planning a major renovation, both are worth pricing.

A merchant cash advance (a lump sum repaid from a share of daily card revenue) at least flexes with occupancy if it's a true holdback. It's still a short, expensive product for what is usually a long-term improvement.

What it costs: a worked example

Say you take $100,000 to refresh rooms before the season, at a 1.25 factor rate (the fixed multiple you repay) over 9 months, paid daily.

• You repay $125,000.
• That's 189 business-day payments of about $661.38.
• The cost is $25,000, which is about 62% APR.

Compare a term loan of $100,000 at 18% APR over 24 months: $4,992.41 a month, $19,817.84 interest in total. The loan costs less in dollars, spreads the payments across two seasons, and is far cheaper as a rate. Test your own offer in the calculator on this page.

Sterling's take: if the advance's term runs through your off-season on fixed payments, it's priced for your best months and paid in your worst.

What funders typically ask a hotel for

• Business bank statements for recent months, often a full year to show the seasonal pattern.
• Card processor statements and agency payout reports.
• Occupancy and average-rate history, if you track them.
• Property deed or lease, and any franchise agreement.
• Contractor quotes for the renovation.
• A schedule of existing debt, including the property mortgage.

Our funding partner's programs suit hotels trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two advances or loans running.

Red flags specific to hotels

1. Fixed payments through the off-season. Ask whether the payment is a share of card revenue or a fixed amount. Model it against your emptiest month.
2. Renovation deadlines that force bad money. A brand deadline can push owners into fast, expensive funding. Start pricing long-term money well before the deadline.
3. Debits beyond what was agreed. The FTC has acted against cash advance providers that debited more than they disclosed and used confessions of judgment against owners' personal assets. Read the default terms before the rate.

Before you sign

Lay the repayment schedule over last year's monthly deposits. The months where it's tight are the months that decide whether the deal works.