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What Do Lenders Look for If You Want to Buy a Hotel

The hotel industry is thriving, and many people look at the profits it can generate, and think about opening a hotel of their own.

The hotel industry is thriving, and many people look at the profits it can generate, and think about opening a hotel of their own.

There are many types of hotel, from the small guest house to the large national chains. Whatever the scale of your plans, you will probably need some external funding before you can open for business.

We look at the lending you may want - and what lenders may expect from you before they can provide the funds you need. 

The costs you need to cover

A hotel is a business, but it depends on a property. It may be possible to lease hotel premises, but in most of cases, opening a hotel will mean owning, or at least having a mortgage on a property.

The high cost of buying suitable property in the right location can be one of the biggest barriers to launching a hotel business. But solutions exist to help raise sufficient funds to buy an existing hotel business or a property suitable for conversion.

You may also be able to provide B&B and guest house services from a property you already own.

You will have other costs to cover. You will need to equip and decorate rooms, and unless yours is a very small operation, you will need to install a commercial kitchen. You may need make costly changes to meet fire regulations.

Business rates, insurance and staff costs will have to be paid, even if you never welcome a single paying guest. Then there are the variable costs, the food, cleaning and supplies that come in with each guest that does arrive.

Publicity will be another expense. You might also need to budget for things like property maintenance, and wear and tear on fixtures and fittings.

It mounts up to a sizable sum. Just how much will depend on your location and the size of your hotel, but even if you already own a property, you probably don’t have enough cash stashed away.

Many business lenders lack the expertise to support the hotel sector.  Fortunately, there are specialists who understand the challenges and opportunities it presents.

But what will they look for when they consider your loan application?

Hotel experience

The hotel trade may seem straightforward, but it is highly competitive and achieving good financial results is not as easy as it seems.

You may feel that you need little experience to run a B&B from your spare bedrooms, but in practice a great deal of knowledge is required for anything more ambitious.

You need to understand the fundamentals of the hotel trade, the skills of the receptionist, the housekeeper, the chef, and the business manager.

Managers of larger hotels typically have a bachelor’s degree in hospitality or hotel management as the basis of their career. Hotels with fewer services and less complicated operations can be successfully run without formal qualifications, but to stand a chance of getting the finance you need, some hotel management experience will be essential.

Lenders will be looking for this experience ideally in the same size and sector as the hotel you want to open.

If you don’t have relevant experience, you might be able to open a B&B or guest house, provided that you have transferable business and catering skills.

Taking courses in those areas where you lack the necessary knowledge could increase your chances of acceptance.

A good location and a suitable property

Lenders who work within the hotel industry will know the potential of a specific location and the suitability of an individual property.

Your ability to spot this potential yourself will help build their confidence in your ability to succeed with your business plans.

A good credit history

Lenders naturally want to be repaid. If they see that you or any business you’ve previously ran has

defaulted on loans, they won’t say yes to a new application.

They also dislike risk. Late, missed payments or even disputed payments which damage your credit score, make your application more of a risk, and approval less likely.

Before you start your application run a credit check. Online services like  Experian may offer free credit checks. Ensure that there are no errors dragging your score down, and if your business credit history is damaged, you need to take steps to repair it before applying.

If you have not got an existing business, lenders may look at your personal credit rating. Make sure that is spotless too.

A convincing business plan

When opening any kind of business, a formal business plan is an essential.  It will help you to organise your goals for your hotel operation and get a clear picture of how to make it a success.

It will also help a potential lender understand your business proposition, and decide whether your business is likely to succeed. This decision will mainly be based on the actual content of your plan, and especially the figures. But remember, it will also be influenced by the way you present your ideas. A professional looking plan will help persuade the lender that your approach is businesslike, and more likely to succeed.

A business plan to demonstrate that your hotel business is worth investing in should include:

Your potential market. Explain what demographic you're catering to, and why they will pick your hotel over another. Will you cater for business people staying for a night, or families staying for a fortnights holiday? Include the size and potential value of this market.

  • Your area. A city hotel is a very different business from a seaside hotel, or from a country retreat. Explain why your location is ideal for your market.
  • A description of the services your hotel will offer. Describe how these will cater for the needs of your market, and whether they will set you apart from other hotels in the area. Will you offer better rates? More personal service? Investors will want to see what makes your hotel unique
  • Details of your property - or the property you are looking to buy. Explain why it is suitable for your market, your business plans and location. Show the costs to acquire it, and to bring it up to the standard you need.
  • A projection for your future earnings. With your accountant's help, calculate your annual revenue and where your hotel will be in the next several years. Show contingencies – how much you need if bookings are below expectation, as well as the optimistic view. You need to make provision for failure as well as success.
  • Provide a full breakdown of your costs right down to fitting out each room and include a good estimate for your day-to-day operating costs. It may take several months for your hotel to start attracting enough customers to cover your expenses, so you'll need cash to stay open during that time. State how long before you expect to start earning a profit.
  • Include tables of financial projections, a profit & loss statement and a cash flow forecast
  • Include details of your own, and your team’s experience of running a hotel and other profitable businesses.

It’s worth getting professional help with your business plan. Make sure you get your accountant to go through the figures. The lender will take your proposal much more seriously if it has been professionally checked.

Adequate security

A lender will probably not provide all the money you need and will expect you to invest your own money to prove that you are serious about your new venture. You may need to put up 10%-20% of the total required.

The lender will probably also require security or collateral. This is something they can take and sell if you cannot make the repayment on a loan. For a hotel, this could be the property itself.

What you should be looking for

Just as a lender will be looking for certain things from you, you should look carefully at any lender and the deal they offer you. Ask yourself if they can offer the funds on terms that are right for your business. Shop around to ensure that you are not paying more than you need to.

Remember that buying a business such as a hotel can be complicated. You may be able to save with ‘jigsaw’ finance. This is where your borrowing is made up of several different types of loan. So you might have a commercial mortgage to buy the property itself, asset finance to equip the kitchen, and a working capital loan to help you get the business through the first months.

There are many hundreds of lenders on the market, and knowing which are most appropriate for your hotel finance needs can save you valuable time, as well as increasing your chances of success.

A lending broker such as our partner Rangewell could help you find the most appropriate lenders, and help you through the application process.

Richard Mitchell

About the author

Richard is one of the members of the Rangewell content team. Richard has worked with international banks as well as fintech business, and now researches and writes all types of content for financial and business readers

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