Financing a Bed and Breakfast – it ain’t easy Getting the Green!

Find out more about CCN that helps American bed and breakfast/inn owners and aspiring owners with sourcing funding for the purchase or refinancing of a hospitality property.

Last week I had the opportunity to speak with Rick Newman, Founder of Commercial Capital Network (CCN) and

Most of Rick’s clients are seeking properties with 5 or more bedrooms or properties whose expenses equal approximately 40% or less of the gross income.

Rick offers three key services – pre-qualification of potential purchasers, recommendations for alternative sources of funding (i.e. using your 401K), verifying inn financials and providing financing to qualified borrowers on viable businesses.

Pre-qualifying potential purchasers for loans

A pre-qualification is not a pre-approval for a loan, as the pre-approval phase requires both the buyer’s qualifications and the information from the property in order to be able to assess the risk or merits of any loan application.

The pre-qualification takes into consideration the following factors:

  • Types of financial options available at that time (i.e. since 2007 it is generally only Small Business Administration (SBA) loans available)
  • The buyer’s financial status (including resumes for both principles and borrowers; financial statements, credit reports and proof of identity
  • The state of the current market (such property values, consumer spending, etc.) and
  • Available loan programs.

Rick recommends that potential borrowers’ have 30% of the project costs, i.e. down payment, closing costs and reserves, available in cash and/or accessible retirement funds.   Twenty percent of the money would be used for the down payment, while the remaining 10% would be used for closing costs and to provide a “cushion”.

The other issue that potential borrowers run into is that they are (generally) unable to include their partner’s income to help debt services (pay) for a commercial loan, making it very difficult to be able to cover the expenses of an inn, the mortgage and still have money left to draw a salary.  Without paying a reasonable salary, most lenders would perceive that type of B&B/inn as a lifestyle inn and too risky.

CCN offers a similar service to hospitality properties that need to be re-financed.

Suggestions for alternative sources of funding

Many people have monies tied up in retirement plans, call 401K in the US.  Just like in Canada, should you decide to borrow from these funds, you are required to make repayments.  If you make a withdrawal, there are taxes to be paid and penalties assessed.

However, CCN has developed a strategy by which owners of the 401K form a new corporation which will own the business assets of the B&B/inn.  Then the funds from the 401K are used to purchase the stock of that corporation (to a maximum of 95%).  This essentially provides potential purchasers with access to funds which will provide a larger down payment for a property.

I would recommend that you read some of the FAQ’s on InnFinancing’s web site about this topic and do additional research prior to considering this action.

Verifying Inn Financials

The final step to move from pre-qualification to pre-approval for a loan requires a review of the financial statements and other related materials from the seller in order to determine if there will be enough money to cover what is known as debt service coverage ratio (DSCR).  When a commercial real estate loan is approved, it is done so on the assumption that the repayment will come from the income created by the property and not from somewhere else (such as a partner’s income).

Documents required to verify a bed and breakfast/inn’s financial status include:

  • 3 years of business income tax returns
  • A year-to-date Balance Sheet and Profit and Loss Statement
  • For comparison purposes, the previous years Balance and P&L Statement for the same period of time
  • A detailed list of capital improvements for the last five years
  •  Photos or web address of the property.

These documents are used to determine if the Debt Service Coverage Ratio (DSCR) will meet general underwriting guidelines.  The figures need to show that after items such as depreciation, officer’s salaries and mortgage interest, are added back into the net profit and loss figures, there are adequate funds left over to comfortably cover the mortgage.

Rick will also provide these services to inns and bed and breakfasts that are thinking of selling, and see this as an advantage to offer potential buyers.

There is a small fee to start this process; however Rick Newman is certainly the man to speak with if you are looking for a commercial property loan to purchase your bed and breakfast in the United States.


  1. Ben Talley

    I am interested in changing my career path and looking at B&B with my wife. We are interested in financing options.

Your email address will not be published. Required fields are marked *