Let’s Talk Money: Top Tips on How to Get Funding for a Hotel

I even imagine sometimes introducing myself as a hotelier. “Hello, I am Harshajit Sarmah, welcome to the Hotel California” (Eagles inspired, of course!)

That sounds so cool!

But I don’t think I will be owning one or even try to venture into it. Well, that’s a different story. Let’s talk about the topic at hand.

In this article, I will talk about how to get funding for a hotel.

If you’re wondering whether it’s an important topic, then YES, IT IS!

For an aspiring hotelier, to set up and run a successful hotel business, s/he will need a fair amount of capital. And this poses a problem for many as they don’t know how to get funding for their hotel. Worst still, we aren’t talking about it much.

So, without further ado, let’s address this subject and find out how to raise capital for a hotel.

Show Me the Money!

The idea of establishing a hotel just sounds good. But the picture is completely different when you get into the process; various challenges come your way. 

• Finding the right location
• Building a team and hiring the right staff
• Deploying the right technology
• Incorporating all the necessary amenities
• Furnishing and equipping the hotel
• Building the effective operational strategies
• Branding, promoting and marketing the hotel
• Licensing the hotel

These are just to name a few. When we talk about starting and running a great hotel, there are innumerable things to consider.

And arranging the capital is certainly a huge hurdle. Because, if you have the almighty dollar, you can, one way or the other, fix a lot of problems.

But, have you ever wondered how do hotels get funding? Or, what are the funding sources? 

These questions are certain to arise. After all, it requires a ridiculous amount of money to build a hotel from the ground up.

What is the Cost of Opening a Hotel Business?

Well, to answer this burning question, I have done some research.

The cost of starting a hotel business varies based on tons of factors. But since you’re asking about the number, here’s what I found.

According to a report by 2ndkitchen, The average cost of starting a hotel in the US ranges from $750,000-$1,000,000 for a small motel, to the national average being around $22,000,000 for a hotel.

Profitable Venture has also addressed this in one of its articles, and it covers almost everything. You can read it to get a clearer picture.

How to Get Funding for a Hotel?

The process of gaining sufficient funds to get your hotel business off the ground is no easy task. However, it is not beyond the realm of possibility.

You just have to build a robust and credible business plan and financial model. Also, keep in mind that raising funds is often a mix of equity and debt. So, make informed decisions.

Now, let’s look at all the ways of raising funds for your hotel. 

1. Bootstrap

Bootstrapping a hotel means starting without the help of outside capital. Meaning, you start from the ground up with your savings, luck, and maybe with the first sales/cash flow from the business.

Further, it has its own set of pros and cons.

Bootstrapping definitely allows hoteliers to run the business on their own terms. However, it is a tough way to go. The hotel industry is already prone to risks and bootstrapping places various other hurdles such as cash flow shortages.

2. Borrow from friends and family

How does this sound? Doable?

Now, why am I suggesting you to borrow from your friends and family is because it is one of those sources of hotel finance where you get much more leeway (unlike official lenders with stringent repayment options).

You can agree on mutual terms and get started with building your hotel.

If your family and friends are capable of lending you money, then you can try asking for that much-needed hotel funding.

3. Crowdfunding

Crowdfunding is one of the popular hotel funding sources. It is a finance mechanism for your hospitality project to raise capital from a large number of people. It is usually done on web-based platforms by displaying the story to potential investors.

Talking about types, there are four different types of hotel crowdfunding:

• Rewards-based: People get a reward in return for his/her contribution.
• Equity-based: In this form, the crowd that has put in money to support the project gets unlisted shares (equity) in the business.
• Peer-to-peer lending: This financing method enables individuals to obtain loans directly from other individuals.
• Donations: It is a gift. People funding a project doesn’t ask for anything in return. But this is not a suitable method for hotels to go for. Because donations are usually for charity, humanitarian aid, or to benefit a cause.

How can you opt for crowdfunding?

There are several platforms available on the internet for crowdfunding. You just need to sign up, create your campaign, and get it live.

Some of the crowdfunding platforms I recommend are:

• Equity Roots
• Vojo Ventures
• HotelierCo
• Indiegogo 
• Fundable
• Catapooolt
• Crowdera

4. Angel investors

Angel investors are like those fairy-tale characters. They appear during unexpected or difficult life events when you’re in special need of hope, comfort, encouragement and connection.

Okay, jokes apart. Let’s talk about the real deal.

An angel investor (also known as a private investor or seed investor) is a high net worth person that provides financial backing to businesses.

But why do they do that? Because, in return for their investment, they typically take ownership equity in the company.

There’s something more you should know. 

The investment could be one-time or an ongoing injection. It completely depends on both the parties and their agreement.

Talking about the advantage of having an angel investor, it is much less risky than debt financing. Meaning, you don’t have to pay back if there’s a business failure in most cases.

How do you find angel investors for your hotel business?

Here’s a brilliant article by The Balance Small Business that has covered everything about finding the right angel investor.

5. Loans

We tend to make unmindful decisions when we are in a dilemma.

For example, if you are continuously thinking about how to get funding for a hotel, there are chances that you might choose the least fit option such as a loan.

When I am saying the least fit option, I don’t mean that loans aren’t worthy. Rather, all I am stating is to be very clear and sure about all the conditions of a loan.

So, do not go to a bank and ask for a loan straight away. Don’t do that!

The best you can do is first decide whether you want to go with a secured loan or an unsecured loan.

Don’t worry, I will explain both.

Secured Loan

A secured loan is basically when you provide security to the bank that your loan will be repaid.

A mortgage loan is a perfect example. For instance, you take a loan from the bank for your hotel business and you provide a property as security. So, if your business fails and you’re unable to pay the loan, the bank has the authority to seize the property to collect the loan.

Unsecured Loan

While on the other hand, unsecured loans don’t require any guarantor or asset. A personal loan is a good example.

However, an unsecured loan is less likely to fund your entire hotel project considering the amount of money you require.

Note: Loans always come with risks. So, I suggest you do in-depth research before obtaining any debt from banks.

6. Incubator and accelerator programs

Incubators and accelerator programs are a collaborative approach designed to help new businesses and entrepreneurs succeed. An incubator could be an organization, platform or a team of experienced professionals. They don’t just provide mentoring and guidance but also help businesses bootstrap during the early stages.

So, if you think your hotel idea is worthy, you can always try reaching out and enrol to incubators to get started.

Things to Keep in Mind

Apart from the funding methods, there are some funding essentials or prerequisites to consider. Further, make sure you do not overlook any of them.

1. Pitch deck

A pitch deck is a brief presentation used by entrepreneurs or businesses to provide potential investors (such as venture capitalists or angel investors) or clients with a streamlined but informative overview of the business.

During the funding hustle, a pitch deck is going to be your best companion. So, make sure you invest enough time and effort in creating a top-notch pitch deck.

If you are in disarray and don’t know how to get started with it, here’s a fantastic article by Masterclass on elements to include in a pitch deck.

Note: The article is not dedicated to hotels. However, you can steal some great insights and tweak them at your convenience.

2. Robust budget

A strong budget is indispensable for any hotel. Before you reach out to investors or even seek a loan from a bank, you must have an approximate budget, at least.

The investors might ask you about your spending plans or how you are going to utilise the funds. Therefore, you need to have clarity of every aspect. This is where budgeting comes into the frame.

We have recently done a hotel budgeting blog. Though it’s written keeping already established hotels in mind, you can refer to it and get an idea.

3. Business roadmap

You also need to have a business roadmap ready. If you aren’t aware of what a business roadmap is, it is a view of where your business is going and how you’re getting there. Simply put, it communicates a business’ vision and facilitates growth.

Now, do not confuse it with a business plan; both are different. Business plans are usually text-heavy documents while on the other hand, a roadmap is a visualization of your business’ big picture.

Not to mention, both are equally important.

4. Analysis of risks

Risk analysis is THE most important factor. Period.

You have to be aware of the hurdles that are going to come your way. And if you bypass risk analysis, you are likely to fall into unexpected trouble. Worst still, you’ll be without any plan of recovery.