Investing in a hotel can be a lucrative and exciting business venture. It is rare, however, that a hotel can be purchased outright. As someone who will need hotel financing, it is important that you understand the mechanisms by which you will pay back your loans before investing. As you negotiate your hotel loans, awareness of these loan features will help you understand how operational aspects impact your borrowing ability.
Cash Management Systems Are Required in Many Hotel Loans
Almost all major hotel loans require the establishment of a cash management system. As a borrower, you will be required to notify all major hotel revenue sources of the clearing account that they must deposit into. Expenses that are associated with running a hotel will be paid out of those funds. These costs include operating expenses, debt service, insurance premiums, and property taxes. The funds will be distributed from the clearing account with one of two cash management systems, known as “hard” or “soft” lock box or cash management arrangements.
Hard Cash Management Arrangements
In a hard cash management arrangement, incoming money is deposited into a lender-controlled account. This money is then distributed among the above expenses as prioritized by the lender. Any excess money will be returned to the borrower, or may be used for operating expenses. While this system assures the payment of debts, it allows for less flexibility in how money is distributed.
Soft Cash Management Arrangements
A soft cash management arrangement offers more flexibility for the borrower. Incoming money would be distributed into a borrower operating account and could be used by you at your discretion. This level of adaptability is advisable, and you should look to build it in to your hotel financing agreement. Having an accessible operating account will allow you greater ability to adapt to day-to-day expenses, including employee wages and benefits. The increased flexibility in this arrangement is a greater liability for your lender. Should there be a default on your loan, the lender may terminate deposits into your operating account and revert to a hard cash management arrangement.
The type of cash management system agreed upon by you and your lender will have an impact on how you maintain your annual operating budget, which is crucial to the success of your business venture. Particularly in hard cash management arrangements, budgets must be cleared with the lender and can result in strict cash management controls. How your income is distributed will be set up in the early stages of hotel financing agreements, which is why an understanding of cash management systems is so important.
Finding growth capital for your business is a lot like finding a way to ask your family for money. You really need to, but are trying to avoid it at all costs. Maybe you’ve thought about opening a few lines of credit. Or you’re debating whether or not to cash in your 401k. If you’re a business owner and are wrestling with similar thoughts, there is somewhere you can go to find capital for your business – and it doesn’t require visiting mom and dad.
The most advantageous source of funding for your business is investors. You may also know them as a venture capital source. To find an investor near you, all you have to do is perform a quick Google search or browse the phonebook. You’re bound to find venture capital firms anxious to make a profit when your business grows exponentially. The benefits of working with investors is that, unlike banks, you aren’t liable to repay their investment if your business is suffering a hardship. Since you aren’t borrowing money, you can also forget about high interest rates. The single drawback is that the investor will also have ownership rights to your company once they supply your business with growth capital.
Venture capital firms are agencies dedicated to investing in businesses simply for profit. They’re not attached to their investment and, generally, have no personal resonance with your business. However, angel investors is a venture capital source that is selective with the businesses they help. These types of investors are usually affluent individuals who desire to make profit and connect with an industry or cause on a personal level. For that reason, many angel investors may have connections that can further promote growth opportunities for your business.
If you do find yourself needing to borrow, there are lots of business and personal options for loans. Traditional banks tend to have higher rates, whereas community-based and private lenders offer more competitive deals. To get the best value possible, seek out an independent financial institution. While there are many locally, you can also find a number of non-traditional banks online.
Even as an adult, having the money yourself is by far the superior way to go about finding growth capital for your business. You’ve heard it since you were a little kid – “a penny saved is a penny earned”. As your business is stagnant due to no influx of funds for growth, you’ll soon realize this statement couldn’t be truer. Look into commercial and non-traditional banks for savings vehicles that can grow interest.
Understanding the difference between commercial mortgage-backed securities and traditional loans is one step of the process to understand the benefits of CMBS conduit loans. A conduit loan has many advantages for borrowers, making a good option to pay for the commercial property. However, it is often misunderstood because it is a fairly new loan product to industry. It’s only been around for about 20 years, but these loans are becoming quite popular.
CMBS Conduit Loans
A conduit loan often originates much like a traditional loan and is structured in the same fashion, but after the loan has been issued, it is securitized and placed in a trust with other CMBS conduit loans. Investors then buy bonds which are issued by the trust. As you pay off the loan, the trust takes the interest and combines it with all the other interest from the loans in the trust. This money is dispersed to the investors, based on the bonds they purchased.
Advantages to Borrowers
CMBS conduit loans typically offer lower interest rates than traditional loans with fixed terms, generally 10 years. There is a minimum loan amount, $2,000,000 or more. The loan is also non-recourse, making it less of a risk for the borrower, because the collateral completely covers the loan in case of default. Of course, the property must be a commercial property, but many types of commercial real estate will qualify, including multi-family, office, and retail. In addition, conduit loans offer more flexibility when transferring property rights for borrowers.
The attractive interest rates are typically what draws in the borrower, because one a loan of two million dollars or more, even one interest point can make a huge difference over the course of the loan. However, there are other factors which should be considered. Should you want to prepay the loan, you have to offer the investors an alternate security, such as a US Treasury bond. The process is called defeasance, and it ensures that the investors get the return on their investment that was expected.
Discuss CMBS conduit loans with your commercial real estate investment team to determine if one is a good fit for your project. There is less competition in the market over traditional real estate loans, making it a good option if your business meets the requirements. It could make a big difference in the profitability of your commercial venture. You’ve got nothing to lose by asking how one would fit into your business plan.
Taking a loan is a big step for individuals, and business financing may be a giant leap. Of course, this may be in a positive sense, since financing can help you grow your business and achieve your goals. However, debt is not something to take lightly, as any borrower will tell you, and it pays to consider some issues carefully before applying for a loan.
Does your business need the loan?
This may seem like an obvious question, but it is essential. People talk about business financing as if it is just another business expense, but perform a cost benefit analysis to see if a loan is necessary. There may be other ways to secure the money you need, such as cost cutting or postponing some plans until the business becomes more profitable.
Can you handle the commitment?
Keep in mind that, in addition to the principal of the loan, there is also interest and fees which can be a sizeable sum. Ensure that, even in lean times, your business can manage this debt, since you may have a slow month in terms of revenues, but the loan payment will always be there waiting for you.
How big of a business financing loan do you really need?
It may be tempting to take more money to ensure the business financing can be repaid, but make sure you have enough growth in your business to absorb the hefty payments. Do a full analysis of the costs of running your operation now and make a realistic assessment of how much your expansion will cost. You may want to borrow more than you strictly need to ensure you have something for a rainy day, but make sure you aren’t overburdening the company with a huge debt.
The benefits of debt versus no debt
Debt can be positive and negative, not only for the ability it can give you to fund projects, but in how it reflects on your company. If your operation demonstrates that it can successfully handle debt, that will help its credit rating and will make it more likely you can secure business financing in the future. However, many investors look at debt as a negative, and are more likely to invest in companies that have little or no debt.
You might look forward to or dread the prospect of business financing, but the bottom line is that whether financing is a gift or a burden depends on how the debt is used.
Whether you can’t afford to buy expensive equipment or you’re just not ready to commit to one piece of machinery, equipment leasing can be a good short-term solution that allows you to still get your work done. Many businesses actually prefer leasing to owning, as it comes with a number of benefits that you can’t get when you purchase something outright. To take advantage of these perks, you’ll need to find the right leasing company; make sure they understand the nature of your business and are interested in saving you money.
Long- and Short-Term Leasing
Every piece of machinery has a different use and may be needed for different amounts of time. If you need a drill for two days, it shouldn’t come with the same contract as a computer you need for six months. The equipment leasing company should be able to offer you a variety of terms, and included within your agreement should be the option to return or exchange equipment you’ve finished using. A good company will even allow you to extend the lease if a particular job is taking longer to complete than you’d initially planned.
Something many leases allow for, and this is part of what makes leasing a smart alternative to buying, is the opportunity to upgrade your equipment when a newer, better model comes out. Technology and equipment are constantly being developed and advanced, and the terms of your lease shouldn’t force you to use a machine that’s becoming obsolete. If your lease allows you to trade in something old and get back to work with something new, your company will be better equipped (literally) to serve customers and stay at the forefront of your industry.
Low Monthly Payments
You have dozens of monthly spending obligations, each as important as the last. Equipment leasing should provide you with manageable monthly payments so that you aren’t crippling your cash flow. What good is renting a machine if you can’t pay the employee who’s supposed to operate it? The company providing your equipment should offer good monthly rates, as well as minimal money down when you first sign the lease. These expenses should always be less than if you’d purchased, as that’s the whole reason you’re leasing.
Your equipment needs to work for you, not the other way around. The leasing company needs to understand this and offer flexible terms that enable you to get your work done, as well as reasonable prices that allow you to keep your business running.
Being in the armed forces taught you discipline, determination, and leadership, all skills that are invaluable when starting a small business. One of the first things you need to consider is how you will acquire the funds needed to get off the ground. Looking for a veteran business loan is a good place to start, and there are traditional options that you should consider as well.
One of the benefits of loans designed for veterans is that, as a veteran, you can receive preferential interest rates. In order to qualify, the business must be at least 51% owned by the veteran, be a for-profit business, and cannot be a lending or a gambling business.
Introduced in 2007, the Patriot Express Veterans Small Business Loan Program is one option. With loan amounts of up to $500,000, a veteran business loan can give you the influx of cash you need, whether you are just starting a small business or are ready to expand.
The Small Business Administration (SBA) has an office that specifically oversees loans to veterans and even has programs that can help with training and filling in any knowledge gaps. These loans are not provided by the Veterans Administration.
As with other loans, you will still need to qualify for a veteran business loan. You must have a viable business plan and be able to provide financial documentation. Your personal credit history may also have an impact on your ability to secure a veteran business loan.
Other Resources for Veterans
Although government-backed options can be helpful, they are not your only resource. There are increasingly more opportunities for veterans to get funding. There are also services that help you prepare the documentation needed to apply for a loan.
The SCORE foundation provides tools to help veterans launch small businesses. They do not provide loans, but do assist by providing software and services to help you qualify. They also have a mentoring program.
A program called StreetShares not only helps vets find loans, but also employs many veterans. They work with other veteran organizations to help fund the veteran business loan program.
A new non-profit on the horizon is the Veterans Business Fund. Their goal is to use private donors to provide the funds for loans, and to keep the interest rates low or non-existent. They are still looking for funding and could be an option for veterans in the future.
Your experience in the military gave you many skills that are useful when starting a small business. Use whatever resources available to help you get that business off the ground, and you’ll be on your way to continued success once you leave the service.
If you’re counting on a loan to start your business, or if you need a small business loan to ramp up production in an already successful venture, having your loan application rejected can feel like a door slamming in your face. Don’t let it stop you, though. There are a few things you can and should do to overcome loan rejection.
For some small businesses, obtaining a loan for your startup can be difficult or impossible. If you have difficulty finding investors or procuring a loan you need in order to fund your startup, you may be looking into alternative methods of financing like retirement funding for your business idea.
You have a solid and positive reputation with your nearby bank, so the likelihood of securing a loan from it is great. However, the terms may not be in accordance with your investment strategies. Banks will give out money to further enhance the assets being financed, but conventional lenders are often reluctant to finance other acquisitions or developments.
Accounts receivable financing allows a business to generate capital by using receivables as collateral. A financing company provides a loan or line of credit secured by the accounts receivable. Receivables are money owed the company by customers, or invoices. It is a popular way to produce working cash flow in order to keep production running while waiting on payments from clients.