Unlocking Hotel Investments: How to Use a Bridging Loan to Purchase a Hotel
Investing in a hotel can be an exciting yet challenging venture. Whether you are an experienced hotelier or an investor looking to break into the hospitality sector, financing your purchase can often be a major hurdle. Traditional banks frequently decline hotel purchase loans due to factors such as the need to work off projections, limited borrower experience, or insufficient historical financials.
This is where a stabilisation bridging loan can provide a smart and flexible financing solution, allowing you to acquire and reposition a hotel while working towards securing a long-term commercial mortgage.
What is a Stabilisation Bridging Loan?
A stabilisation bridging loan is designed for commercial property investors and hotel owner-operators who require time to execute their business plans before transitioning to a commercial mortgage. Unlike conventional loans, these are structured to be more adaptable, accommodating investors who are working with projections rather than strong historic financials.
Why Banks Decline Hotel Purchase Loans
Traditional banks often refuse financing for hotels due to:
- Needing to work off projections – If the hotel is underperforming, banks may require proof of future profitability before lending.
- Lack of borrower experience – If an applicant has little or no experience in hospitality, banks may consider them high risk.
- Historic financials not strong enough – If the hotel has suffered from poor financial performance in recent years, traditional lenders may reject the application.
- Debt service cover limitations – Banks require a certain level of income to cover the debt, which may not be met if the hotel is in a turnaround phase.
- Minor adverse credit history – Even a small credit issue can result in rejection from high street lenders.
A stabilisation bridging loan helps overcome these barriers, allowing investors to acquire a hotel while working towards long-term financial stability.
How a Bridging Loan Can Help You Buy a Hotel
A bridging loan can provide the short-term capital needed to complete your purchase and implement improvements before transitioning to a more traditional financing structure. Here’s how it works:
Typical Structure of a Stabilisation Bridging Loan
- Interest-only facility priced at approximately 7% over the base rate (0.96% per month)
- 2 to 3-year term to allow time for operational improvements
- Interest serviced, or a combination of retained and serviced interest to ease cash flow pressure
- No exit fee or early repayment charge (ERC), allowing flexibility
- Loan-to-value (LTV) typically 60% of Market Value 1 (MV1)
What Type of Properties Qualify?
While primarily used for hotels, stabilisation bridging loans can also be used for:
- Care homes
- Holiday lets
- Industrial/warehouses
- Offices
- Retail
- Semi-commercial/mixed-use properties
- Portfolios of commercial properties
Case Study: Projection-Led Bridging Loan for a Hotel Purchase
Let’s look at a real-world example of how a bridging loan helped an investor acquire and stabilise a hotel:
The Scenario:
A hotelier who already owns two hotels identifies an opportunity to purchase a third hotel. However, the hotel’s current owners have lost interest, leading to a decline in business and a neglected property in need of refurbishment.
- Purchase Price (PP): £1,000,000
- Loan Provided: 60% of purchase price (£600,000)
- Day 1 Net Loan: £553,000
- Interest Structure: 6 months interest retained, loan serviced from month 7
- Loan Term: 2 years
- Exit Fee: None
Why This Worked:
- The retained interest period provided six months of breathing room for the hotelier to get operations running without immediate repayment pressure.
- The loan was underwritten against projections and the investor’s business plan rather than just historical financials.
- The valuation assessment considered the hotel’s Full Market Trade (FMT) potential, allowing a realistic and achievable lending decision.
Common Mistakes to Avoid When Using a Bridging Loan for a Hotel
- Not Having a Clear Exit Strategy – Always plan how you’ll refinance or repay the loan.
- Underestimating the Costs – Factor in renovation costs, operational expenses, and any unforeseen expenditures.
- Overlooking Loan Terms – Ensure you understand the interest structure and repayment requirements.
- Ignoring Market Conditions – Conduct due diligence to assess the hotel’s true potential for profitability.
- Failing to Consult Experts – Work with experienced brokers to secure the best terms and avoid pitfalls.
Frequently Asked Questions (FAQs)
Can I get a bridging loan with no hotel experience?
Yes, but lenders may require a strong business plan and the involvement of experienced hospitality professionals.
How long does it take to secure a bridging loan for a hotel?
Typically 2-6 weeks, depending on the complexity of the deal and required documentation.
What are the best exit strategies for a hotel bridging loan?
Refinancing into a commercial mortgage, selling the hotel at a profit, or securing long-term investment funding.
Why Choose a Bridging Loan for Your Hotel Purchase?
- Speed: Bridging loans can be arranged much faster than traditional mortgages, ensuring you don’t miss out on a prime opportunity.
- Flexibility: These loans accommodate investors working with projections rather than requiring strong past financials.
- Improved Cash Flow: With options to retain interest for the initial months, you have time to stabilise the business before making payments.
- Exit Strategy: You can refinance onto a commercial mortgage once the hotel is performing profitably, making bridging loans a stepping stone to long-term financing.
- No Exit Fees: Unlike some traditional loans, bridging finance allows you to repay early without penalties.
Final Thoughts – Your Next Steps
If you’re an investor looking to acquire a hotel but facing challenges in securing traditional financing, a stabilisation bridging loan could be the ideal solution. Whether you’re a first-time hotel investor or an experienced operator expanding your portfolio, bridging finance offers the flexibility and speed you need to complete your purchase and implement your business strategy.
At Sunrise Commercial Finance, we specialise in tailored bridging loan solutions for commercial property investors and business owners. Our team of expert brokers can guide you through the process, ensuring you secure the best possible financing for your hotel acquisition.
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