Alternative Sources Provide Available Financing

Alternative Sources Provide Available Financing

Reprinted from Advanstar
Hotel & Motel Management Magazine
October 19, 1992
By Jeff Wilder
Wilder Group, L.L.C.

The Small Business Administration and Small Business Investment Corps. are valuable and available avenues to consider using for your financing needs. I have had, or heard of, good experiences with these two money sources and would like to bring them to your attention. Neither route seems to involve any significant amount of dreaded government forms or extensive approval processes. However, you should work with experts that deal with the SBA so that you can determine for what program you might qualify.
Over the last few years, underwriters such as The Money Store in Sacramento, Calif., have carved a niche for themselves by underwriting motel first-mortgage applications in the $1 million range. Briefly, if you provide proof of the hotel's value, are willing to put up 25 percent to 30 percent equity, and have hotel experience, then your potential for successfully obtaining a hotel loan is good.

Gaining Approval

Several underwriters have gained the confidence and respect of the SBA so that when a potential financing need is professionally presented, it is ripe for approval. Approval generally means that the U.S. government will guarantee a large enough amount of the loan that the underwriter can then easily access capital. Rates generally are 2.75 percent over prime and can be locked in at closing; repaying schedules are 20 to 25 years long. Once the underwriter receives all of the information on you and the hotel you'd like to purchase, it takes about two months to process the application and get the package set for funding.

SBICs, Limited Partners

SBICs are located throughout the country. I think that the best way to look at them is as a limited partner that must be paid a return on his investment. You can retain control as long as you meet your obligations to your lender. Since SBICs are all separately owned, you must promote your deal to individual SBIC owners. While one company might be interested, another may not. One company might offer you a better financial package than another. Or, you simply might like the people more at one particular firm.

Unlike SBA loans underwritten by companies such as The Money Store, that require a first mortgage on the property, SBICs do not. While their interest-rate requirements are higher, they'll generally look at subordinated loans that are junior to primary indebtedness. This is especially useful when existing primary financing is in place and you need secondary-bridge financing, or an equity partner, in order to complete the deal.

Honest And Professional

If my experience in working with an SBIC is any indication of what you might encounter, then you can expect to be dealing with honest and professional people. If they like you and the acquisition, they'll work with you to make the deal happen. After all, the SBIC is a privately owned, for-profit corporation. Its income and equity grows primarily by funding the needs of businesspeople.

I suggest that you call the SBA in order to obtain a list of all approved SBICs. Then, visit those that are geographically proximate to you and the property you're interested in purchasing. I believe that hotels have many of the elements that provide comfort to a secondary lender or equity partner. You'll be able to show past financial records; primary, or first mortgage financing may well be in place - a nice plus; and a national flag affiliation will provide additional comfort.