Merchant Cash Advance Blog

Hotel Construction Financing Options for Construction Businesses

   Tuesday, 23 January 2018 14:18 PBC Blog

Hotel Construction Financing Options for Construction Businesses

The real estate markets have been showing signs of recovery. This comes after more than two years of what has been described as acute tightening. Some time since the economic strangulations in the country in which there was a general decline in real estate lending, and especially in the area of hotel construction financing.

In recent times, however, hotel owners have witnessed a renewed interest in hotel investment in the area of construction loans.  In the same vein, there has been an increase in the number of loan applications, suggesting that investors are having a feeling that the time is right to go back into the hotel construction financing market. The hotel lending market is currently different from what it used to be. At the moment most hotel lenders will typically insist on a down payment of about 25 to 40 percent before a loan is issued in the first place. This is a huge deviation from the 10 to 20 percent which it used to be in the past.

There is something else that is quite troubling about construction lending for hotels. Since the end of the economic recession, there has been a general decrease in bank lending to small businesses. This is quite disturbing because banks have been the leading providers of credit to small and medium-sized businesses. But there has been a decrease in overall bank lending to small business by around 20 percent, and ironically there was a reported increase in lending to huge firms by around 7 percent. This means that the determining factor of whether or not a hotel is going receive hotel construction financing has much to do with its size.

Decline in hotel construction financing from commercial banks

The situation in the construction is even more alarming. As far back as the early part of 2009, it was recorded that both local and regional banks were responsible for origination more than 65 percent of all the hotel loans in the country. Shockingly, that figure has fallen to somewhere around 37 percent. The result of this has been that national lenders are realizing that both small and sophisticated borrowers are turning to the so-called alternative lending institutions. The question of what happened to bank loans is one that cannot be answered easily; but, on a general note, it can be said that regulations—from both the federal and state levels— have become more stringent, ensuring that hotels do not meet the requirements for hotel construction financing.

Read More:Commercial Lending and the Future of Merchant Cash Advance

SBA loans and Loans from Insurance Companies

In the wake of the current economic recovery, other companies such as insurance companies are beginning to beam their searchlights on the hotel construction industry. Insurance companies, in particular, feel that since the bottom of the recession has passed that it is time to start financing hotels again. The government which had been committed to hotel construction financing, especially when it has to with the small ones, has also sought to revive its SBA program which had an internal program that was suited to the need of hotels. For instance, the small business administration 504 program which had almost gone into extinction is being revived, with the government setting up a program to enable a better secondary market for the front side of the SBA 504 loan.

The federal government through the small business administration is already providing some guarantees for investors who would buy pools of the first liens in the 504 loan program. It is expected that with this intervention of the government that hotel construction financing will become more available to hotel owners and developers as the risks the lenders face are substantially reduced with the adoption of the SBA loan program. In spite of all these efforts, hotel financing is still not available to hotel owners hence the need for alternative sources such as merchant cash advance.

What exactly is a merchant cash advance?

Merchant Cash advance by its very nature is not a loan of some sort; rather it can be viewed as a commercial transaction between a business—in this case, a hotel—and a merchant cash advance provider in which the business agrees to sell a portion of its future receivables to the merchant cash lender in exchange for a lump sum of cash.

Owing to the fact that a merchant cash advance is not a loan in the traditional sense of the word it does not attract interest payments. A merchant cash advance is a lending alternative that is best suited for high revenue generating businesses of which the hotel business is a typical example. A merchant cash advance, although not suited for certain forms of businesses such as those that are online based, can serve several purposes for a business.

It can be used to generate working capital, fulfill payroll obligations, purchase equipment, and even for construction. If for example hotel construction financing probably to renovate a hotel, or for an already existing hotel to finance the building of a new branch, a merchant cash advance might as well be the optimal choice for the funding. The reason for this is that it removes all of the hassles associated with bank loans, and also the risks tied to online lending.

The major advantages of merchant cash advance over mainly bank loans as a source of construction finance is something that shall subsequently be discussed in detail. For now, let us take a look at what events would occur when a hotel approaches a merchant cash advance provider for hotel construction financing.

What does construction financing through merchant cash advance really involve?

Once a hotel owner makes known his intention to obtain funding for a construction project to the merchant cash advance provider, preparations are made for the eventual signing of the merchant cash advance agreement which is a legally binding document that entitles the merchant vendor to a share of the revenue of the business, which is used to gradually offset the loan.

The merchant cash advance agreement would typically contain details of the factor rate, withholding amount and well as the total payable amount. The factor rate is a figure that is usually less than 1.5 that is used to account for the fact that the amount which is given to the business for the hotel construction financing at the present would be worth more than that in the future. What this means is that the sale of the future receivables of the business is done at a discounted rate.

In order for this payment to be made, a fixed percentage or amount of the daily credit card sales of the hotel owner (of course, in the case of merchant cash advance, hotel construction financing has to be obtained for renovation of existing hotels, or building of another outlet, or by a business owner that is seeking to branch out into the hotel business) is deducted on a daily basis to pay back the loan.

The amount or percentage that is decided upon usually depends on a number of factors. One of the major factors that are considered is the volume of revenue that the borrower is making from his current business. Because the amount involved in hotel construction could be sometimes, and because merchant cash advance providers would typically give a business a cash advance equal to about 50 percent of its monthly revenue, a business has to be making enough from credit sales to be able to qualify for hotel construction financing.

Once an agreement has been reached on the withholding amount, then the payments are made on a daily basis until the advance has been repaid. In most cases, the advance is expected to be repaid over a period of 18 months or less. As such only business owners generating so much in terms of sales can be eligible for merchant cash advance for the purpose of hotel construction.

Read More: The Alternative Finance Market: What is out there for small companies?

Benefits of obtaining hotel construction financing from merchant cash provider

Obtaining hotel construction financing through merchant cash advance has some significant benefits. Quite a few people are aware of the rigorous and lengthy process of obtaining construction loans from commercial banks.  The entire process could take several months and is not without financial costs. But for a merchant cash advance, the process could be completed in a matter of days and the cash made available to the business owner. This is because a large amount of documentation required for processing a bank loan is not all needed in an MCA application; only a few documents such as financial statements for the previous couple of months and other minor documents are required.

Apart from the fact, the whole process is so quick; there is also no collateral requirement. Yes, merchant cash advance regardless of whether it is needed for hotel construction financing or not is usually unsecured, meaning that only the merchant vendors bear the risk involved. And, if the business owner is unable to repay the advance the lender can make no claims against him.

In addition, it is not required for a business to have an excellent credit score—as banks often require—in order to be eligible for construction financing. However, there is still a minimum score which varies from provider to provider, although generally less than what banks or other traditional lenders would require.

Finally, although it is somewhat more expensive to seek hotel construction financing from merchant cash advance providers. The reality of it all is that since merchant cash advances are totally unsecured their cost is justifiable. Meanwhile, if one is to consider other benefits, then it is quite clear that merchant cash advance provides value that probably exceeds its cost. All said and done small business owners whether in the hotel industry or not are already beginning to acknowledge merchant cash advance as a ready alternative to commercial bank loans.


We provide two highly accessible financing programs that can get your business the working capital it needs in days instead of months.

For a small business, obtaining a traditional loan today is a complex and difficult process. That’s where Premier Business Capital comes in. 

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