Owning and operating a hotel is, like any business, dependent on a strong and stable source of finance. Without access to a flexible finance solution, hotels will struggle to grow and expand as they are constricted by their cash flow and the demands of day-to-day operation. In order for hotels to break free of their bottom line and take advantage of opportunities it’s necessary to arrange a highly adaptable, high-speed finance source, and bridging finance is a perfect solution.
Bridging loans are a fast and flexible form of finance, secured against the value of the borrower’s assets. As such, it’s vital that anyone considering a bridging loan fully understands the terms and conditions of this type of funding; before proceeding with a bridging loan, hoteliers should consult a financial advisor, to ensure that bridging is the right answer for their circumstances.
Many successful hotels are able to meet their ongoing operating costs without the need to source financial backing. However in many cases a business will be unable to generate significant capital purely through revenue; the demands of daily expenses reduce the amount of cash available for investment in opportunities. In addition, large sums of capital do not generate income on their own, and in order to continue growing a business must reinvest money as it is made - there’s little point in sending money to the bank when it could more profitably be re-invested immediately.
Because it’s hard for a business to build up reserves of capital, it’s not easy for them to take advantage of opportunities for expansion when they arise. If a valuable extension property becomes vacant, for instance, a hotel will not have the money on hand to finance its purchase, and will need to quickly secure a source of funding in order to take ownership of it. This is where bridging finance is vital to the success of a hotel, because it allows a hotel owner to put in place a financial package for continuing growth.
To illustrate the ways in which bridging finance can be used by hotels to finance expansion we’ll consider an example. A medium-sized hotel has been trading for several years, and whilst many of its assets are still under finance it is pulling in a profit. The hotel occupies part of a building along with several other businesses, and is looking for the opportunity to expand when possible. As it turns out, one of the other businesses in their building is in financial difficulties, and is struggling to pay off debts - they want to downsize from their current premises, but need to close a sale swiftly to meet their outstanding bills. If the hotel is able to act quickly, they’ll be able to purchase an extension to their property at a discount, but even though they’ve been offered a bargain price they still have nowhere near that amount of capital on hand.
This is when bridging finance is necessary, and when it opens up new possibilities for hotels to expand. While many long-term financial solutions like mortgages take a long time to arrange, a bridging loan can often be obtained with funds ready for drawdown in just 7 days. This enables borrowers to act exceptionally quickly when the need arises, and to act confidently and decisively to secure opportunities for expansion.
As mentioned previously, a bridging loan is a form of secured finance. This means that the loan is backed by the borrower’s assets; if they fail to repay, the lender is entitled to reclaim their money by selling these assets. In real estate finance (like the example given above), the property is generally taken as security, but it is possible to use almost any valuable asset as collateral. There are two main forms of security that are used by hotels; first charges and second charges, and both types provide different options to borrowers.
A first charge security means that the lender is first in line if the property needs to be reclaimed, and there are no other lenders whose investment must be satisfied first. This is generally preferred by lenders because it makes it easier for them to reclaim their money, should it become necessary, but it does limit the assets which can be used as collateral. In the above example, the hotel would be able to secure a loan on their new property as a first charge, but not on their current properties (as these are still under finance).
A second charge security is, as the name implies, security offered on an asset that is already financed. In these situations it’s more difficult for lenders to claim back their money through the sale of the asset, as they must ensure that the first charge holders are repaid first. If the hotel in our earlier example decided to securitise their existing property in order to obtain a bridging loan, they would only be able to offer a second charge; this is because they already have a mortgage in place. If the bridging lender wanted to reclaim their loan by forcing the sale of this property, they would need to make sure the entire mortgage was repaid before they could receive anything themselves. For this reason a second charge security is usually much more expensive than a first charge, although it does give borrowers a great deal of flexibility.
Bridging finance offers a great deal of flexibility and adaptability to hoteliers and hotel owners, and the ability to quickly move to secure opportunities for expansion is highly valuable. By putting in place a hotel bridging loan that’s tailored to their client’s specific requirements, bridging providers are able to generate bespoke financial packages that mirror their customer’s needs and help them to achieve their business goals.
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