Commercial loans signal the beginning of long-term business banking relationships—and promise a major source of revenue. What’s more, the sectors ripe with opportunity are plentiful: manufacturing, energy and healthcare are all popular examples of commercial verticals that banks consider as they source new lending opportunities. But—and here’s the challenging part—many lenders fail to recognize the low-hanging fruit in new and developing verticals.
Enter a historical outlier in traditional commercial lending portfolios: hospitality financing.
Why has hospitality lending been so often overlooked? Consider its reputation as a daunting niche. To begin with, hotel lending requires a specialized understanding of the market. But with the right resources, hospitality’s high rewards can constitute a strong addition to any lending portfolio. With the recession in the rearview mirror, the industry has not only maintained stabilization for about a decade but has also managed to grow despite oversupply, higher costs and disruptors such as Airbnb. In fact, the industry borrows an estimated $40 billion-plus annually, making it one of the more successful portfolios when evaluating total return and customer profitability.
For example: One hotel borrower can easily generate a cumulative lifetime value in the hundreds of thousands of dollars. It’s a smart vertical for those financial institutions that can structure their application and underwriting processes to lessen the risks.
So how to begin? Financial services organizations seeking to enjoy the perks of hospitality financing must learn more about the vertical and what makes its borrowers unique. Those that decide to offer hospitality lending should determine how to assess prospective borrowers and extend large loans. This means working to uncover the reason or story behind the individual borrower’s needs or requests. Getting familiar with the sector is a must for these conversations; it alleviates the borrower from explaining the hotel market as part of the application and decisioning process.
Of course, hotel investments are much more complex than determining the market need and the borrower’s story. Hospitality loan applications can create complications for three reasons:
- Hotel project loans are significantly larger than those for any other commercial real estate properties. In 2017, the average hotel loan was $59 million—almost double that of all other major commercial real estate categories. (Offices came in second at $33 million.)
- Hotel loans can show more sensitivity to uncontrollable external factors such as economic fluctuation, legal changes, technology and competition. They also have a degree of other risk factors, including new construction or newly opened hotels that lack historical operating data.
- And, due to bank uncertainty in financing hotel projects, borrowers are sometimes forced to use multiple lenders at different project phases. This further increases the complexity of the process.
And yet bankers can gain more access to this relatively untapped market by using technology to simplify its complexities. The right tech tools can centralize and digitally organize data and documents required for a loan application—providing lenders with a request that’s well prepared and easily digestible. The best of these tools can also direct borrowers to pinpoint the information lenders need and gather it just once. This prevents them from repeatedly providing the same information to different departments within the institution—or to different lenders for the same loan request.
The right technology at the right time can also prevent lenders from pestering the borrower for more information multiple times: a time-consuming process that can spark frustration. For instance, no standard approach exists to analyze global cash flow (GCF), which accesses the full picture of the combined cash flow from a group as it relates to debt. Guiding borrowers as they organize required information and documentation before underwriting time streamlines workflow from the word go. It also presents a better case for the proactive lender while simplifying the process for the borrower.
Granted, no commercial loan is without risk. The applicant’s previous experience, local market and competition within that market will provide a vital understanding of the sector and its promise of profitability. Solid knowledge of the sector also necessitates personal interaction with borrowers and assistance from modern technology; all of this goes a long way toward making wise, calculated decisions in hospitality lending.
New lending platforms have created an opportunity for competition in the hospitality lending market today. Lenders that make a name for themselves early on have a lot to gain—checking in well before the “no vacancy” sign appears.
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Anuj Mittal is co-founder and CEO of CrediVia.