The State of B&B Lending

As I have spoken with B&B Brokers and appraisers across the country lately I’ve gathered lending to the bed and breakfast industry has gone from challenging to difficult. It would seem lenders are increasingly edgy about financing and money so are making things challenging at the very least and being more particular about the mortgage loans they write.

There was a time you could buy a bed and breakfast with something other than a commercial loan. I’ve seen residential loans, 30%-down low-doc(low documentation required), and investment loans. But it seems that even commercial loans are harder to come by for well-qualified buyers.

Getting a good loan for your bed and breakfast purchase requires a good buyer and a good property. That means the buyer needs to have strong ficos scores and financial reserves, 20-30 percent down, and the property needs to have a long and stable history and cash flow. The appraisal value needs to meet or beat the contract price too.

As the variables change so does the quality of the loan. The weaker all of the elements are the more stringent the loan requirements and the edgier the lender is, which is reflected in interest rates, down payment needs, and collateral requirements. Or a loan that won’t be approved.

For example, one inn had a strong buyer but the inn was more of a hobby bed and breakfast so the bank wouldn’t give the residential loan that was applied for, something they might have done at one point. Another loan wasn’t approved, though the inn was strong, because the buyer wasn’t strong, having only 15 percent down and no reserves. Commercial loans aren’t always the answer either, though they tend to be a more sure way to go.

Lenders have always found it easy to say no to B&B loans because they aren’t comfortable with the inn’s operations, the inn’s location, or the buyer’s background. But it seems that’s more the case today than ever before.

To be a strong buyer have solid ficos scores (over 800 normally impresses lenders); at least 20% down, and preferably 30%; six-months- to a year’s-worth of operating expenses readily available in an investment vehicle; and at least have taken a B&B class if not also worked at a B&B for several months. The more you can do to strengthen your position the better your borrowing situation will be. Also have a business plan that shows how you plan to pay for the inn’s operations and how you will grow the business; the more precise you can be with your plan and projections the more the lender will respect your business savvy, which is part of what is being examined. Then you need to buy a strong B&B.

What does a strong B&B look like to a lender? It has at least three years of business and cash flow; records are clear and accurate; tax returns and P&Ls show growth and good management; and an appraisal that at least meets if not exceeds the contract purchase price of the inn. A B&B that’s in good physical condition and has a good advertising campaign in place is looked at more favorably than one that’s weak in those areas.

But even with everything looking strong, you may face buying hurdles you didn’t anticipate, and you wouldn’t have had to face even a few years ago. I think some of the elements that have come together to create this lending climate include the recession, oil prices, the war, lenders who were maybe a bit too easy with loans, sellers who didn’t keep good financial records, and inflated purchase prices.

Creative financing isn’t the approach to take with B&Bs. Don’t highly leverage yourself because lenders aren’t likely to approve such a situation, and even if they did you don’t want to expose yourself to losing everything when the market drops. And the market always drops for some period of time. The more leveraged you are the less cushion you have for extended slow or down periods.

I often have found local/regional lenders are more interested in lending on B&Bs in their community to support the local industry than those found outside the area. That’s not always possible, but some lenders have a reputation of lending locally. Be a strong buyer with a strong inn, and find that lender who loves your location and property to increase the chances of getting a loan for your B&B.

Perhaps the problems some B&B Brokers are experiencing partially came from not working with local lenders. Perhaps it’s because buyers and sellers pushed the envelope of what lenders should be doing, and got caught and therefore rejected. And some of it is probably a reflection of the U.S. economy.

But I have had B&B Brokers tell me lenders are looking for deals and can’t find one to write a loan for. So maybe the point is more that the problem deals reflect less-than-ideal purchase scenarios and the lender is walking away rather than risk their lending portfolio.

Be a strong buyer if you want your B&B dream to come to fruition. Strive for putting 30% down on the purchase of your inn, have a good credit rating or ficos score, and buy an inn that the income supports the purchase price. Both buyer and inn need to have clear records that don’t raise questions. And shop your loan first with local lenders and see where that takes you.

If the economy is nervous, do your part to demonstrate your business savvy and increase your chances of getting an approved B&B loan.

2 thoughts on “The State of B&B Lending”

  1. Hi Kit,
    This is good information, although my real estate agent was able to get the financing for us. But, the other side of the coin is finding lenders for Working Capital. Maybe I am jumping the gun and this was going to be your next article, but it has become a quest for us to find this type of financial assistance. What’s the word from your view?
    Leslie Passons

  2. Leslie, my next topic isn’t going to be about financing working capital. :~) In my experience working capital is hard to get when you need it, though it’s not too tough when you are flush. But then, that’s the way of the world. So when you are flush, go get a line of credit to use for your working capital. It will ease the crunches.

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