A Small Business Administration (SBA) loan is a popular option for all sorts of businesses, and the hotel business is no exception. Many hoteliers who seek to finance the purchase of a hotel property, either a new construction or an existing hotel, turn to a government-backed SBA loan rather than a conventional bank or private lender. It can be taxing to navigate the process, but in the long run, it could be quite beneficial, depending on the intended transaction and the size of the hotel.
“The program is set up to make capital more readily available for small business owners. They will offer you higher leverage than a conventional lender typically would, and they are incentivized to do that because they have the backing of the SBA,” said Michael Harper, president, hotel lending, with Peachtree Group.
Applications for SBAs have been trending upward across industries. “It’s been a very active source of capital as of late. In the last couple of years, banks weren’t as active as providing commercial real estate loans, but the SBA has continued to be active,” Harper added.
“In these uncertain economic times, we have conditions that are pushing people out of the market and being driven to SBA loans, so we’re seeing this really sharp increase in SBA lending, and I’m assuming the same is true for hotels as well,” added James Carras, principal of Carras Community Investment, Inc. and lecturer at Harvard Kennedy School of Government.
In fact, last year, Vice President Kamala Harris released a fact sheet noting that SBA loans provided $56 billion in 100,000 small business financings in 2024, a record increase over the past 15 years.
Why Apply for an SBA Loan
In the hotel world, an SBA loan is typically utilized for acquisition of a property and is a great tool for newcomers to the industry. “Let’s say you were buying a hotel and it was your first hotel purchase, and you don’t have the track record that a typical bank would require, an SBA loan is fantastic,” Harper said.
Scott Gilman, SBA development business manager, United Federal Credit Union, agreed that it is a great avenue for a potential hotelier. “A first-time hotelier often has difficulty obtaining financing through traditional means due to a lender’s more stringent underwriting that may include previous ownership experience, lower loan-to-value thresholds, or shorter amortizations. The SBA is established to assist those first-time buyers by allowing lower injection, longer term amortizations, and more flexible experience requirements.”
Gilman goes on to state, “SBA is there not only for those first-time hoteliers, but for existing hoteliers as well by offering the ability to refinance a maturing note, for example, with a longer-term amortization (25-30 years depending on the SBA program) and can include property improvements, or it will allow for the buy-out of a partner or convert the hotel to another flag.” This is why an SBA loan makes so much sense for hoteliers and should be considered when such needs arise.
Carras said that an SBA loan can be a great tool for hotel developers and owners who are those with small and mid-size projects.
Another reason why SBA makes so much sense for hoteliers is, because it is a special purpose property, it is hard to take a hotel and make it something else if it doesn’t succeed. “When you do have special purpose property, it creates more risk. The benefit of an SBA from a lending viewpoint is you get a guarantee from the government, which takes some of the risk out of it. You’ve got that government guarantee, so a lot of hotels are financed with an SBA, at least initially,” Gilman said.
“It is easier to get a conventional loan if the hotel is part of franchise because it’s a known quantity to banks. Because it’s more structured for people who aren’t otherwise qualified, it is easier to get an SBA loan for a boutique or independent hotel,” Harper added.
Types of SBA Loans
SBA loans fall into two categories: a 504 and a 7(a), and while both serve similar goals, they are structured differently.
A 504 hospitality loan involves two loans: a conventional first mortgage and an SBA second mortgage. Such loans typically require 15-20 percent down payment, with a fixed interest rate based on a bond sale over a 10–25-year term on the SBA’s secondary loan. The conventional first mortgage rate is set by the lender and can be variable or fixed. The prepayment penalty on the SBA/CDC’s secondary mortgage extends over 10 years. This type of loan is primarily used to finance the acquisition or purchase of property and can be used for renovations, though not for working capital. A 504 may be most appropriate for larger transactions.
“This is the most enticing and exciting loan product SBA has for hotels, particularly smaller and mid-sized deals,” Carras said.
The 7(a) loan, which Harper said is akin to a first mortgage lending, is more flexible. The maximum loan amount is five million dollars, all of which is from a single source: a lender backed by the SBA. The loan is guaranteed up to 75 percent. The interest rates can be higher than 504 rates and are typically variable based on WSJ Prime. Unlike the 504, the 7(a) loan can be used for anything from property acquisition to working capital to refinancing debt to property improvements and only carry a prepayment penalty during the first three years for loans that have terms over 10 years. For hotel owners, this flexibility means they can fund furniture, fixtures, equipment, or even a rebranding effort.
Gilman said that, from a lender’s viewpoint, utilizing an SBA for property improvements is appropriate if the hotelier is refinancing at the same time; otherwise, it can be more difficult to secure such financing. A good time to do improvements is at acquisition, because the franchisor will often require it. “Also, the SBA is a good financing option if you want to convert the property to a different flag either at time or acquisition or finance,” he said.
“For those hoteliers that are looking to solely do improvements, it is best to go back to your existing lender, as the lender would be more receptive to improvements to the property since they already hold a mortgage on it. And such improvements will, typically, create a more valuable asset for both the borrower and lender,” he added.
Gilman said that under the Trump administration, the SBA now requires all owners of the borrowing entity to be U.S. citizens or lawful permanent residents (i.e., green card holders).
Advantages/Disadvantages of SBA Loans
Carras said that one major advantage of these types of loan is a low-down payment requirement of 10 percent. He said that this is significant, because traditional lenders likely will seek at least 20-30 percent equity.
Another plus is the longer repayment term for the length of the loan, which is 25 years; longer term loans translate into lower monthly payments, with more competitive interest rates. This helps alleviate financial pressures when business is slow. “The long-term fixed-rate option is very attractive,” Carras said.
Favorable interest rates are another advantage to this type of loan.
Finally, and perhaps most importantly, there is a greater chance of approval compared to conventional loans because the SBA guarantees the loan, making it a good option for newcomers just entering the hotel business.
Disadvantages are fewer, but the application procedures can be quite a cumbersome process, though the same can likely be said for most other types of loan applications. Carras added that the approval timeframe can take several months, unlike conventional loans, in which a borrower may hear back more quickly.
Another disadvantage, Harper said, is you have to pay an SBA guarantee fee, whether you obtain a 7(a) or a 504 loan, though he said the tradeoff is generally worth it. Also, some SBA loans have more stringent pre-payment features than conventional loans.
Tips for Maximizing Your SBA Loan/Chances of Approval
Most experts will say that the key is to be prepared and making sure that the lender has as much information as possible and for the borrower to be organized. “I think the key is do your homework, and homework is coming up with a very strong business plan, answering all the questions that anyone potentially could have and detail it in a fashion that is readable and understandable,” Carras said.
“Make sure that the numbers are realistic in today’s market, don’t inflate them, make them conservative, because the trust question will come into play. All the world operates on personal relationships. Bankers and lenders are human and they will do the same with you. If they don’t trust you from day one, they will have a problem moving forward,” he added.
“The more organized and on point you are as a borrower, the more conviction they will have to make the process easier. The more info you can have prepared and ready to go, the smoother the process will ultimately go,” Harper said.
Gilman added that because such financing is backed by the federal government it does have very specific guidelines. Therefore, a potential borrower should seek a lender that specializes in the program. Specific to the SBA 7(a) program, the government provides Preferred Lender Status (PLP) for those lenders that have met certain thresholds. PLP status allows the lender to directly underwrite, close, and fund an SBA loan leading to quicker approvals and closings. This should lead to less frustration that many believe applying for an SBA loan will create.