3 Common Hospitality Financing Mistakes that Borrowers Make
Whether you need to raise less than $50,000 to hire staff for the busy season, or over $1 million to support an expansion, the fact remains that the need for hospitality financing never ends: it ebbs and flows based on a variety of factors and variables; some internal, and others external.
However, the need for hospitality financing isn’t the only thing that’s common. Borrowers — often because they are misled by unprofessional and unethical lenders — also make common mistakes, which can be very costly in both the short-term and the long-run. Here are 3 of the most frequent errors, and even more importantly, how you can avoid them:
3 Common Hospitality Financing Mistakes & How to Avoid Them
- Hospitality Financing Mistake #1: Not understanding all of the lending products available: The term “loan” is a catch-all category that covers multiple products, ranging from a working capital loan (lump-sum cash infusion with fixed and scheduled payback), equipment financing (lump-sum cash infusion to cover most of the cost of purchasing equipment), accounts receivable financing (essentially selling invoices for a lump-sum cash payment), and the list goes on. Some lenders won’t explain all of your borrowing options — not necessarily because they don’t know what they are (though in some cases this is true!), but because they don’t offer them. Or, if pressed about a specific product that they don’t offer, they’ll try and terrify you from heading in that direction. A legitimate lender who is worthy of your business will:
- Offer multiple lending products vs. just one or two.
- Clearly explain how each product works, including their benefits and drawbacks.
- Openly and objectively give you their opinion on products they don’t offer, and invite you to do what’s best for your business — which may mean that you move to another lender.
- Not having a clear idea of what you need to use the funds forNot knowing what you need to use the funds for is a self-inflicted financial wound, because it is virtually a foregone conclusion that one of two things will happen; and neither are in your interest:
- You will borrow more than you need, which means that “dead money” will sit in your account and increase your total cost of borrowing
- You will borrow less than you need, which means that you will have to scramble to fill the funding gap — which can be costly, time consuming and stressful, and you could miss out on time-limited opportunities. Now, this doesn’t mean that you need to employ the services of a psychic (“The crystals tell me that you will be running out of funds when you need to purchase FFE…”). Obviously, it’s not realistic to expect that you’ll nail down your prediction to the cent. But you should have a solid awareness of how much you need to borrow, so that you reduce the chances of experiencing either of the above.
To that end, your lender should work with you to help you (if you wish) identify the optimal borrowing amount, and also have strategies at-the-ready to help you minimize your total cost of borrowing (e.g. augmenting a working capital loan with a business line of credit, which can be drawn down as needed).
- Not realizing you don’t have to jump through bank hoops: If your hotel, motel, lodge, chalet, B&B, etc. lived through the Great Recession that erupted in 2007, then there’s a very good chance that you have a default, foreclosure, workout or bankruptcy somewhere in your history.
Very few hospitality entities emerged unscathed. And even if your operation launched more recently, you may have run into cash flow challenges that resulted in ding or dents to your credit profile. Hospitality has always been a high risk, high reward industry — and sometimes the scales tip towards the former (and often for reasons that are completely external to each operation). If you only deal with your bank, you can expect to face several obstacles and jump through many hoops — including giving up control of how you can use the loan — presuming that it is approved in the first place, which is not necessarily going to be the case.
However, if you head into the alternative lending marketplace you’ll find a much warmer reception — because lenders in that space are not subject to bank restrictions, and what’s more, they’re simply more flexible and interested in serving your needs. And they’ll demonstrate this by (for example) looking beyond credit scores — or even an open tax lien.
Learn More About Hospitality Financing
At National Business Capital, we provide a full range of hospitality financing products and solutions. Unlike banks, we don’t require high credit scores, and since we know that time is of the essence— especially in the hospitality sector — we review applications and render approval decisions within 24 hours. What’s more, our clients are empowered to use the funds as they deem best.
If you’re looking for opportunities to grow your hospitality business, check out our free eBook “7 Profitable Opportunities that You Could Miss Without More Business Funding” today: