Top tips to fund a hotel purchase with the right loan

Buying a hotel property requires different finance than buying a house or even a standard commercial building.

The loan amount depends on projected revenue from room bookings, bar sales, and food service, not just the property value. Lenders assess your business plan, cash flow forecast, and debt service coverage ratio to decide if you can service the loan. The interest rate, loan structure, and repayment terms reflect the operational risk of running a hotel, which means you need to demonstrate you understand the business or have management in place.

How lenders assess hotel property acquisitions

Lenders treat hotel purchases as business acquisitions combined with commercial property transactions. They want to see three years of audited business financial statements from the current operator, proof of occupancy rates, and a breakdown of revenue streams. Your own business credit score matters, but the hotel's historical performance carries more weight. If the hotel has been turning over $2 million annually with consistent occupancy above 65%, that strengthens your application. If occupancy has been dropping or the business is seasonal without working capital to cover low months, expect tighter terms or a higher deposit requirement.

Consider a buyer acquiring a 20-room boutique hotel in Scarborough. The property includes a ground-floor bar and restaurant. The seller provided three years of financials showing annual turnover of $1.8 million with an average occupancy rate of 70%. The buyer prepared a cash flow forecast projecting modest growth based on planned renovations to four rooms and an expanded food menu. The lender approved a secured business loan at a variable interest rate with a 30% deposit. The buyer also secured a separate business line of credit for working capital to cover the quieter winter months when coastal tourism drops.

Secured vs unsecured business loans for hotel purchases

A secured business loan uses the hotel property and business assets as collateral. This structure typically offers a lower interest rate and access to a larger loan amount because the lender has security. You can borrow up to 70% of the property value, sometimes more if the business has strong cash flow and you bring substantial working capital. Most hotel acquisitions use secured lending because the loan amount required exceeds what unsecured business finance can provide.

Unsecured business finance does not require property as collateral, but the loan amount caps at around $500,000 for most small business loans. The interest rate is higher, and approval depends heavily on your personal and business credit score. Unsecured options work for funding fit-outs, purchasing equipment, or covering unexpected expenses during settlement, but not for the full purchase price of a hotel property. Some buyers combine both: a secured loan for the acquisition and an unsecured business loan or business overdraft for working capital during the first six months of operation.

Loan structure options that suit hotel operations

Flexible loan terms matter when cash flow fluctuates with tourism seasons or local events. A variable interest rate loan with redraw lets you make extra repayments during high-occupancy months and redraw funds when bookings slow. Some lenders offer interest-only periods for the first 12 to 24 months, which reduces pressure while you stabilise operations or complete renovations. A business term loan with principal and interest repayments becomes more suitable once revenue stabilises.

A progressive drawdown works if you are buying a hotel that needs refurbishment before reopening. The lender releases funds in stages as renovation milestones are met, so you only pay interest on the amount drawn down. This structure is common in hotel acquisitions where the property has been closed or requires compliance upgrades before trading. Flexible repayment options, such as the ability to switch between interest-only and principal-and-interest without refinancing, give you room to adapt as the business grows or contracts.

Fixed vs variable interest rates for commercial hotel lending

A fixed interest rate locks in your repayments for one to five years, which helps with budgeting if profit margins are tight or you are managing other debts. The downside is limited flexibility. You cannot make large extra repayments without incurring break costs, and you miss out on rate cuts if the market shifts. A variable interest rate loan costs more when rates rise but allows unlimited extra repayments and often includes redraw and offset features.

Many buyers use a split structure: 50% fixed and 50% variable. The fixed portion protects you from rate increases during the first few years when cash flow is less predictable. The variable portion gives you the flexibility to pay down debt faster once the hotel is profitable. In our experience, buyers who plan to expand operations or reinvest profits prefer variable or split structures because they want the option to reduce the loan amount quickly without penalty.

What lenders want to see in your business plan and cash flow forecast

Your business plan should explain how you will maintain or grow revenue, manage staffing costs, and handle seasonal variations. Lenders look for a detailed cash flow forecast covering at least 24 months, with realistic assumptions about occupancy, average room rates, and food and beverage margins. If you are new to hospitality, include details of any management agreements or key staff you have secured. If you have experience operating hotels or similar businesses, provide evidence of that track record.

The debt service coverage ratio measures whether your projected cash flow can cover loan repayments. Most lenders want to see a ratio of at least 1.25, meaning your net operating income is 25% higher than your debt obligations. If your forecast shows a ratio below that, you may need to increase your deposit, provide additional collateral, or demonstrate other income sources. Some lenders will accept a lower ratio if the hotel has a long lease to a corporate tenant or a management contract with a reputable operator.

Funding fit-outs, equipment, and working capital alongside the purchase

Buying the hotel is one cost. Fitting out rooms, upgrading the kitchen, replacing furniture, and holding enough working capital to cover wages and stock for the first few months is another. Equipment financing or asset finance can cover kitchen equipment, laundry machines, and point-of-sale systems without inflating the main loan amount. These are often structured as separate agreements with terms that match the life of the equipment.

A business line of credit or revolving line of credit provides access to funds for working capital without drawing down a lump sum. You pay interest only on what you use, and as you repay, the available credit replenishes. This suits hotel operators who need to cover wages, stock, and maintenance between peak periods. Invoice financing is less common in hospitality unless you have significant corporate bookings or events business with delayed payment terms, but it can provide a cash flow solution if you are waiting on large invoices to clear.

How Makara Finance structures lending for hotel acquisitions

We work with lenders across Australia who understand hospitality operations and assess hotel purchases based on business performance, not just property value. We help you prepare the financial documents lenders require, including cash flow forecasts, debt service coverage ratio calculations, and business plans that address operational risks. We also structure loans to match your growth plans, whether that means flexible repayment options, progressive drawdown for refurbishments, or a combination of secured and unsecured lending to cover the purchase and working capital.

If you are looking at a hotel property and want to understand your borrowing capacity and loan options, call one of our team or book an appointment at a time that works for you.

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