Financing for a bed and breakfast is one of the most difficult roadblocks to overcome.
Several of the questions I was asked in June’s Ask Me Anything session were around how I managed to finance my bed and breakfast as a single person.
Here’s my story
I was fortunate enough to own a house in a large urban centre; once I had sold that and bought the property in Parry Sound that I wanted to renovate, I took out a line of credit against the house. That way, I was only paying interest on the money I was using, when I needed it, as opposed to a standard mortgage. It also turned out to be a wise move as the line of credit also provided me with a slush fund – as time went on and I needed to do more renovations based on what my guests wanted – and is the case with any old house, the repairs that were required. The good news is that in Canada, you can write-off the portion of interest that applies to B&B portion of house against the income you generate (you need to check what your local situation is).
Organizing your finances for starting up a bed and breakfast (compared to other businesses) has two crucial things going for it:
- Most bed and breakfast properties are residential real estate
- Once you’ve purchased the furniture, linens, appliances, etc., your capital expenses tend to be minimal
However, there are drawbacks:
- Most banks are not interested in loaning to a start-up business – especially if you want to use the income from the business to pay the mortgage!
- Like insurance companies, banks will see this as a home-based business and want to charge commercial rates
- The amount you can get as a mortgage – or line of credit – is based on the appraised, rather than market value
- If the property has unique characteristics such as special architectural features or some historical aspect that would help it stand out as a bed and breakfast, banks do not take that into consideration
The most common reasons potential bed and breakfast owners hear when they are being turned down for a loan are:
- Their lack of business experience in the hospitality sector means the bank perceives an increased risk as the owners’ will fail to anticipate the challenges of the business
- Their business plan doesn’t prove there is a local market (and therefore revenue) for the b and b
- Most B&B income is cyclical and banks worry that monthly payments will not be consistent
What would you recommend to get the money start this business?
The next question I was asked was how I recommended potential bed and breakfast owners get the money to start their B&B.
The first piece of advice I have is that you are going to have to contribute your own money – if you’re not willing to invest in your business, why would anyone else?
I am not a financial adviser, so I am not advocating for any of these means – but have you considered:
- Retirement savings, other investments and property you already own
- Checking out what government loans and grants are available at the federal, provincial or state and local/regional levels for small business
- Short-term loans and/or personal lines of credit, including credit cards
- Seeking out money from friends and relatives, an investment partner or “angel”?
So, how do you improve your chances for getting your plans funded?
You can play a big role in increasing your chances of success by:
- Include your research as part of your business plan in the appendices
- Make sure you have allocated suitable funds and a strong marketing plan as part of the business plan
- Be prepared to provide back-up documents for your balance statement to prove your net worth
- Include realistic cash flow statements using the research you have done to prove you can meet your financial targets and monthly loan payments.
Doing your research for your business plan is key to writing a successful business plan. If you need help and guidance for that aspect, check out “Learn How Much Money Your Future B&B Can Earn” – Step 3 in the Design Your Dream Bed and Breakfast System. This step takes you step-by-step through all the research to analyze any property to make sure it will provide the money and time to do the things you want.