There are several preconceived notions that can work against the process of finding a bank to partner with you in the form of financing your purchase of a Bed and Breakfast Inn:
Bigger is better.
In fact many smaller banks with roots in the community where the Inn is are more apt to have specific knowledge about Bed and Breakfast operations. Most bigger banks find our Bed and Breakfast industry banking needs to be too small for them to make any money. They have bureaucracies and procedures that seem designed to frustrate potential borrowers. Officers at bigger banks are told “never to say no.” They tend to wear you out, always asking for one more document. Smaller banks and their officers know their markets and, with help from SBA (Small Business Administration), can make these smaller loans profitable.
Banks will pre-approve you for loans.
This is a particular nuisance factor for me. Recently, several customers have come to us announcing that they are pre-approved for a certain amount of loan. Banks can look at a home buyer and calculate how much debt they can absorb. The house itself is passive other than an asking price. In the purchase of a Bed and Breakfast, a bank will look at the dynamics of a property (sales, income, and occupancy) as well as the buyer’s financial and operational experience. Pre-approving really means nothing when the Inn part of the equation is not known.
Ask the banker what they will do before you have a plan.
You shouldn’t ask the bank – put your deal together, and then tell the bank. You are doing them a favor, not the other way around. You shouldn’t ask a banker what the bank will do. It is important that you tell the banker what your needs are and don’t depend upon a banker telling you what the bank will do. Invariably it will satisfy the needs of the bank, but not the borrower.
Cash flow history is everything.
Cash flow is important, but not everything. Some bankers understand that you are buying the future and the bank is funding the future. Real estate value and personal financial strength also count, but the informed banker will look at all aspects of the proposition.
SBA loans are government loans and therefore filled with red tape.
In fact, the government has very little to do with the SBA loans. They are most often handled by local or state Certified Development Corporations (CDCs). SBA loans are designed to enable business development that would not be possible under normal conditions. They provide for 80% financing and a fixed interest rate.
Bankers expect long, detailed business plans.
Like the rest of us, bankers are overloaded with work and appreciate a plan that simply covers the essentials. Basically they want to know who the buyers are, what the business is doing, what the buyers need for financing and very important, how they plan to repay the loan. We have a template that covers all this in about 20 pages. The table of contents should look like this:
- Description of the deal.
- Sources and application of funds.
- Personal information – informal resumes of the borrowers.
- Informal description of personal activities related to Innkeeping.
- Personal financial statement.
- Three years’ Profit and Loss statements from the Bed and Breakfast.
- Debt service and payback.
Financing is a critical part of most Inn purchases. Make sure you avoid the myths addressed above and provide a workable plan for the bank. Remember, you are doing them a favor by allowing them the opportunity to lend you the money and create a profit for the bank!