It’s been a tumultuous few years for the hotel industry. Although there have been dips and rises in profitability, it remains a popular business choice. Renovation is one of the first things hoteliers consider when taking over a new establishment, and even those that have been running their business for a while tend to use renovation as a reactive tool rather than a proactive one. This is down to the vast sums of money involved. With such a high level of risk, it’s no wonder that hotel operators have been known to delay renovations until it’s too late. How can hoteliers finance their improvements, and what’s the best way to do so?
The Planning Stages
The most effective refurbishments have:
- A clear strategy
- A productive relationship with the managing and owning companies
- High level of involvement with customer feedback
- Financial necessities
Not every hotel needs an immediate refurbishment, especially if you have only just taken hold of the keys and accepted your first booking. However, if you’re the proud owner of a new establishment but the current online reviews are scattered with comments like “outdated decor,” then the chances are high that you are already losing potential customers. Before you start to look at the costs, make sure that you know the signs to watch that will highlight the need for a renovation:
- Bookings have a low capture rate compared to local competition
- Your competitors are in the process of renovation
- Net income is dropping
- Too many negative reviews on online forums like TripAdvisor
- If you have purchased a hotel franchise, then a renovation or refurbishment may be mandated
Renovation is an expensive task, and throughout the process your hotel will be hit by issues such as your marketability, the overall profitability, a drop in public perception, and even your ability to remain working as a functional hotel.
Key Areas of Hotel Renovation
Your hotel renovations are going to be explicitly guided by the financial backing that you have. Having a firm plan in place will help you to manage those high costs much more efficiently, and will allow you to strike a more realistic balance between what you want and what constraints you are bound by. The problem is that hotel renovations can vary in cost significantly, depending on the size of your property.
Guest Rooms: Whether you are adding new rooms, increasing the size of your existing rooms, improving facilities, or upgrading the IT and entertainment options available to guests, the more rooms that you are hoping to transform, the more it’s going to cost. It’s often factored in when writing your hotel’s business plan, as it is usually something that needs to be considered every seven years.
Front of House: Often the first step in a renovation process, and will depend on the current trends or your vision of what you believe your hotel brand should represent.
Meeting Spaces: As a more recent trend in maximizing profits in a hotel environment, a renovation is now very likely to include conference facilities for guests. It can be an enormous renovation task and will need to include transformability and facility offerings to customers.
Back of House: You should prioritize this area if you are hoping to improve staff productivity. A kitchen and cellar renovation can help streamline the day-to-day running of your team.
You need to ensure you have the financial resources to see you through to completion. There are four commonly used options that hoteliers are most likely to opt for when securing their funding.
- SBA 7a Loans
- SBA 504 Loans
- USDA B&I Loans
- Traditional bank loans
The terms of your repayments will vary, but you can usually expect to see around 5-9% in terms of interest. It will depend on the source of your funding, but you may have up to 25 years to pay back what you have borrowed in full. It’s important to remember that elements like your credit score will play a large part in determining how much you can borrow and where you can borrow from. However, there are alternative options to consider if the more commonly used types are unsuitable or unavailable.
If you don’t have the time to wait for the approval of an SBA loan, and the bank is unwilling to take a risk, then you do have options.
FF&E Loans: If you opt for an FF&E loan (furniture, fixtures, and equipment), you will need to bear in mind that being the recipient of this loan type may negatively affect your ability to apply for an SBA loan as well successfully. For equipment financing, they are a good option, but you should be aware of how it might affect any future renovation plans. Equipment depreciates over time, so always make sure that you check the potential real-world value of your new equipment with an Equipment Calculator. Doing so can help to guide you when it comes to knowing how much is worth borrowing and could save you a lot of wasted time and expense.
Investors: There are two types of investment option available.
- Angel Investors are private individuals who are looking for good businesses and people to invest in, in the hopes of seeing a greater return on their investment.
- Venture Capitalists are investment firms, and will usually only look at investing in a business of a specific size and value.
Remember: If you do opt for an investor, you may gain some business knowledge and experience, but you may also have to sacrifice part of your ownership of the hotel.
Crowdfunding: This is an option that is certainly available, but it can take time, experience, and money to secure the financial backing needed to afford your renovations. It is possible, and some companies have successfully managed a crowdfunding campaign to buy or grow their hotel brand. For many, it will usually be better to learn how to apply for a business loan than to learn how to manage a crowdfunding campaign.
If your hotel is looking tired and outdated, a renovation should always be a priority. Making sure that you have the available finances is one of your first steps. Make sure that you know how much work is entailed, how it’s going to affect your ability to make a profit throughout the renovation process, and factor in any potential issues. The less you plan and organize, the more likely that your renovations will negatively affect your profitability.