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For entrepreneurs looking to purchase an inn, bed-and-breakfast (B&B), or boutique motel, Small Business Administration (SBA) loans are often the best financing option. However, before lenders approve these deals, they carefully evaluate specific financial and borrower metrics. Understanding these criteria in advance can save time, strengthen your loan application, and improve your chances of approval.
Let’s break down the key financial and borrower metrics lenders focus on when financing small hospitality properties.
1. Business Financial Performance (Tax Returns & P&L Statements)
When acquiring an existing inn or B&B, SBA lenders primarily underwrite based on the historical performance of the business being purchased. The most critical documents include:
- The past three years of tax returns
- A year-to-date profit and loss statement (P&L)
- A recent balance sheet (if available)
The first question lenders ask is: Does the business generate enough cash flow to cover the new loan payments? This is measured through the Debt Service Coverage Ratio (DSCR)—a standard requirement for SBA loans.
2. Borrower Qualifications & Experience
Lenders also look closely at the borrower’s profile. Key factors include:
- Credit history – Strong personal credit demonstrates financial responsibility.
- Outside income – Income beyond the inn or motel can help support personal expenses.
- Hospitality experience – While not mandatory, prior experience in hotels, short-term rentals, or customer service strengthens the application.
- Proximity to the property – Living within a 2.5-hour radius of the business increases lender confidence in hands-on management.
Even without direct hospitality experience, borrowers can qualify with a solid business plan and professional background.
3. Equity Injection (Down Payment)
SBA loans require a minimum 10% equity injection. For example:
- On a $1 million acquisition, the buyer needs at least $100,000 down.
However, creative structuring is allowed. Sellers can contribute through a “seller carryback on standby” for up to 7.5% of the equity requirement. This means a borrower could potentially acquire a $1 million inn with just $25,000 out-of-pocket.
4. Value-Add Potential and Business Plans
Not all hospitality acquisitions are turnkey operations. If a property has been mismanaged, underperforming, or requires renovations, lenders will still consider financing if a solid business plan is presented.
Key considerations include:
- Projected financials demonstrating improved cash flow
- Renovation or repositioning plans
- Necessary permits and licenses secured before closing
SBA lenders often approve projection-based deals if the borrower shows a clear path to profitability.
5. Post-Close Liquidity and Reserves
After funding the down payment, lenders expect borrowers to maintain some post-close liquidity. Having reserves demonstrates financial stability and reassures lenders that the owner can weather unforeseen challenges in the early stages of ownership.
6. Loan Structure Options (7(a) vs. 504)
SBA loans come in multiple formats, and lenders will evaluate the best fit for your acquisition:
- SBA 7(a) Loan – More flexible, often used for smaller acquisitions or working capital.
- SBA 504 Loan – Ideal for real estate-heavy transactions, offering longer fixed rates.
- SBA 504 Green Loan – Designed for properties incorporating energy-efficient upgrades.
Choosing the right loan structure can make a significant difference in terms, interest rates, and repayment schedules.
Final Thoughts: Preparing for Success
Purchasing an inn, B&B, or boutique motel through SBA financing is achievable—even without direct hospitality experience—if you meet key lender criteria. Focus on:
- Gathering three years of business financials
- Demonstrating good credit and financial responsibility
- Securing the 10% equity injection (or structuring a seller carryback)
- Presenting a strong business plan with realistic projections
- Maintaining liquidity reserves post-close
With these elements in place, lenders are far more likely to approve and fund your deal.
If you’re considering acquiring a hospitality property and want expert guidance, schedule a consultation at BookWithBeau.com. Our team works with a wide network of SBA lenders to help entrepreneurs navigate the process and secure financing for their dream property.