Beginner's Guide to Buying a Hotel With a Business Loan

Buying a hotel is a big step, and the loan behind it needs to suit how the pub actually earns its money. If you're in Bairnsdale and eyeing off a pub, motel or accommodation hotel, the lending side is very doable with the right preparation.

How Do You Finance the Purchase of a Hotel?

Most hotel purchases are funded with commercial lending secured against the property and the business. You'll usually need a deposit, and the amount depends on your lender and the strength of your application.

A hotel is two things at once: a building and a going business. Lenders look at both. They want to know the property is sound security, and they want to see that the trading income can cover the repayments. That's why a hotel loan is different from a home loan, and why it pays to speak to a broker before you sign a contract.

Our business loans and commercial loans pages explain the general options. A broker can compare lenders across Australia for you, as each one weighs hotels and licensed venues differently.

What Do Lenders Look at When You Buy a Pub?

Lenders mainly want to see that the business makes enough money to comfortably pay the loan. They'll usually ask for business financial statements, tax returns and a cashflow forecast, and they may want to see your own experience in hospitality.

Two measures come up a lot. The first is how much profit the pub makes compared with the repayments, often called the debt service coverage ratio. The second is your own financial position, including other debts and what you can put in as a deposit. Checking your borrowing capacity early gives you a realistic ceiling before you fall in love with a venue.

A written business plan helps too. If you're taking over a pub, explain what you'll keep, what you'll change and how you expect takings to hold up during the changeover. Lenders like to see you've thought about the quiet months as well as the busy ones.

Secured or Unsecured: Which Suits a Hotel Purchase?

A secured loan, where the hotel property is the collateral, is the usual route for buying a hotel because of the size of the loan. Unsecured business finance generally suits smaller needs such as topping up working capital, and it typically costs more and comes with lower limits.

The trade-off with secured lending is that your lender can sell the security if you can't meet repayments. Be clear on what else is pledged, such as other property you own, before you commit.

Interest-Only or Principal and Interest: A Worked Example

Interest-only repayments are lower in the early years, but you don't pay down the loan, and the repayments jump when the interest-only period ends. Here's an illustrative example to show the gap.

Consider a buyer who needs a loan of $1,500,000 for a regional pub. We'll use an illustrative rate of 6.75% p.a. for every figure below. This is an example only, not a current offer, and your actual rate will depend on your lender and your deposit.

• On principal and interest over 25 years, the repayment is about $10,360 a month.
• On interest-only, the repayment is $8,437.50 a month.
• If the buyer takes three years interest-only, the loan balance is still $1,500,000 at the end. The principal and interest repayments then run over the remaining 22 years, which lifts the monthly figure to about $10,920.

In a scenario like this, the buyer chooses interest-only for the first three years. That leaves roughly $1,925 a month spare while they settle in, learn the seasonal rhythm and put money into the venue. After three years, they move to principal and interest and budget for the higher repayment. The outcome is breathing room early on, paid for with a higher repayment later and no reduction in the debt in the meantime.

The lesson is to plan for the step-up from day one, not when it arrives. A broker can model both versions with your real numbers.

Fixed or Variable Interest Rate on a Hotel Loan?

A variable interest rate can move up or down over time, while a fixed interest rate locks in your repayment for a set period. Which suits you depends on how much certainty you need and how much flexibility you want.

Fixing gives you a known repayment for budgeting, but it can limit extra repayments and may involve break costs if you exit early. Variable loans often allow extra repayments or features like redraw, though your repayments can rise if rates rise. Some buyers split the loan across both. It's worth asking the lender how the options work before you decide.

Budgeting for the Costs Beyond the Purchase

The loan for the hotel is only part of the money you'll need, because fit-out, plant and working capital also add up. Think about kitchen gear, cellar equipment, poker machines if applicable, and a cash buffer for wages and stock.

Equipment can sometimes be funded separately through equipment finance, which keeps more of your cash available for running the business. The trade-off is another repayment to carry, so it needs to fit in your cashflow forecast. A working capital buffer is also worth building in for the first few months while trading settles.

Getting Ready Before You Make an Offer

Get your finance position checked before you sign anything, because contracts on hotels can carry tight deadlines. Pre-assessment lets you know what you can borrow, what the lender will want to see and how long the process might take.

Bairnsdale is the main service centre for East Gippsland, so as a local you'll know how trade can shift with the seasons and visitor numbers. Bring that knowledge to the conversation. A local mortgage broker in Bairnsdale can pair it with the lender side to build an application that tells your story clearly.

If you'd like to talk it through, call one of our team or book an appointment at a time that works for you. We'll look at your numbers, explain the options in plain English and work out a loan structure that suits the pub you have in mind.

Frequently Asked Questions