A strategic guide for independent hoteliers
By Jigar Desai
The hospitality financing landscape has undergone a fundamental shift since 2020, and independent hoteliers face a markedly different environment than their pre-pandemic counterparts. While the challenges are real, understanding the current market dynamics and adapting your financing strategy accordingly can mean the difference between securing capital and watching opportunities slip away.
The New Reality: Tighter Standards, Selective Lenders
First things first: Underwriting has become significantly more conservative. Where senior loan-to-value ratios of 70 to 75 percent were commonplace before 2020, today’s conventional bank loans typically max out at 60 to 65 percent. Banks are demanding debt service coverage ratios of 1.4 times or higher, and their stress tests have become exceptionally rigorous.
This isn’t just about being cautious, it’s about survival. Lenders witnessed firsthand how quickly hotel cash flows could evaporate, and they’re not eager to repeat that experience. The result is a financing environment that rewards preparation, conservative projections, and strong sponsor profiles above all else.
Your Financing Options: Quality Over Quantity
For independent hoteliers, the financing landscape has consolidated into two primary viable paths: Small Business Administration (SBA) lending and local community banks. This might seem limiting, but it actually provides clarity for strategic planning.
SBA financing has seen increased volume, particularly through 7(a) programs for acquisitions, property improvement plans, and working capital needs. With guarantees up to 75 percent and leverage potentially reaching 90 percent, SBA loans offer the flexibility that many independent properties require. Although the rates are typically variable and prime-based, the higher leverage often justifies the cost structure.
Community and regional banks are selectively re-entering the market, but they’re prioritizing seasoned sponsors in durable markets with lower leverage profiles. If you have a strong track record and can provide substantial equity, these relationships often yield the most favorable long-term partnerships.
Strategic Decision-Making: When to Choose What
The SBA versus conventional financing decision shouldn’t be made in a vacuum. Consider SBA when your deal involves smaller properties (typically under $5-10 million), requires higher leverage, includes significant renovation work, or when you’re an owner-operator with limited liquidity reserves. The program’s flexibility with FF&E and working capital funding can be invaluable during repositioning efforts.
Conventional financing makes sense when you can comfortably inject 30 to 40 percent equity, the asset demonstrates stabilized cash flow, or when interest rate sensitivity outweighs leverage considerations. The key question: Does your deal prioritize leverage and flexibility, or scale and rate efficiency?
Overcoming the Independent Hotel Penalty
Lenders will almost always prefer branded properties over independent ones. Branded hotels provide loyalty programs, historical performance data, and proven marketing systems that reduce perceived risk. But this doesn’t mean independent hotels are unfinanceable; it means you need to work harder to tell your story.
Your strategy should focus on demonstrating business resilience and operational sophistication. Present robust pro formas with conservative assumptions, highlight your direct booking strategies and repeat guest base, and provide competitive set data showing equal or better performance than flagged properties. Consider
soft-brand affiliations when possible as they provide the “best of both worlds” by offering distribution systems while maintaining operational independence.
For independent properties, having an experienced management company or proven operator attached to your financing package is often the single most critical factor. Without a flag to rely on, lenders need confidence that your team can drive revenue, control costs, and manage compliance effectively.
Prepare for lenders to scrutinize operating history, property condition, market demand drivers, and your borrower profile intensively. They want evidence of stable performance, manageable capital expenditure requirements, and professional operational systems. Red flags that consistently derail deals include weak sponsor profiles, deferred maintenance, unrealistic projections, and inadequate insurance coverage.
Budget 2 to 4 percent of revenues annually for insurance, including property, liability, business interruption, and workers’ compensation coverage. Lenders typically require umbrella and business interruption coverage, so it is important to factor these costs into your pro forma from day one.
Timing and Process Management
Set realistic expectations for the financing timeline. Conventional loans generally require 60 to 90 days from application to closing, SBA loans need 90 to 120-plus days, while bridge debt can close in 30 to 45 days with clean due diligence. The most common obstacles are appraisal shortfalls, environmental findings, capital expenditure adjustments, and rising insurance costs.
It’s critical to prepare by proactively commissioning property condition reports, ordering environmental studies early, and stress-testing your debt service coverage ratios and property valuations. This front-loaded approach prevents last-minute surprises that can derail transactions.
Looking Forward: The Refinancing Opportunity
With maturity walls approaching, refinancing activity is increasing selectively. Consider refinancing when rates drop significantly, when your loan is 12 to 18 months from maturity, or when NOI growth and stabilization allow for equity release or conversion from recourse to non-recourse terms.
The current environment, while challenging, also presents opportunities. Treasury yields have eased since mid-year, and markets expect continued Federal Reserve cuts through the end of year. This gradual rate relief should bring more buyers and sellers off the sidelines, creating opportunities for well-positioned independent hoteliers.
The Bottom Line
Success in today’s financing environment requires a different approach to what historically worked. Focus on building strong lender relationships, maintaining conservative leverage profiles, and demonstrating operational excellence. The independent hoteliers who thrive will be those who view these constraints not as obstacles, but as competitive advantages that separate serious operators from speculative players.
Jigar (Jay) Desai is senior vice president at NewGen Advisory, a full service commercial real estate brokerage firm specializing in hospitality and lodging assets and a Silver Industry Partner. With an extensive background in the hotel industry, he works closely with buyers and sellers as they navigate every step of the transaction including lending, financing, marketing, and more.
Photo by Scott Graham on Unsplash
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