Every hotel faces urgent financial demands. Sometimes it’s a broken HVAC system during tourist season, while other times it’s a limited-time chance to renovate your rooms. At times like these, you need fast access to capital without jumping through hoops. Should you pursue a merchant cash advance (MCA) for a hotel or hospitality business loan?
Both financing options have advantages, drawbacks, and ideal use cases. When you choose the right one for your situation, you keep your operations running smoothly and grow your business without missing a beat.
This guide walks you through the differences between MCAs and hospitality loans so you can decide which is the better fit for your hotel’s urgent funding needs.
What Is a Merchant Cash Advance (MCA) for Hotels?
An MCA is a lump-sum advance based on future credit or debit card sales. It’s known for same-day approval and funding, minimal paperwork, and flexible or fixed repayment. A business cash advance differs from traditional loans in several ways.
Providers initially calculate the total repayment amount rather than charging interest. They multiply the advanced amount by a borrowing rate. For instance, if you secure $10,000 with a 1.2 factor rate, you’ll owe the lender $12,000. Knowing how much you’ll pay back can help you plan your finances and track your repayment progress.
Also, unlike a loan, credit and debit card transactions are the foundation of an MCA. Providers look at your card sales to determine the advance amount and typically collect a percentage of your daily, weekly, or monthly transactions as repayment. That means your payments can adjust with your cash flow, increasing when business is strong and decreasing when it slows.
A merchant cash advance for hotels considers your business model and customizes a basic MCA to meet your needs. You can qualify with seasonal revenue, as long as it’s consistent. And you can pick from daily, weekly, or even monthly percentages or fixed payments from the most flexible hospitality lenders.
What Is a Hospitality Business Loan?
Hospitality loans offer short-term business funding for lodging businesses. They typically refer to term loans, but could include lines of credit or equipment financing. It depends on your needs and lender. Banks, credit unions, online funding companies, fintech lenders, and specialized hospitality financing providers provide different options.
A hospitality business loan can offer significant funding amounts and long repayment terms beyond one year. It’s predictable. You pay interest on the borrowed amount and make consistent monthly payments until the end of the term.
Approval criteria vary between lenders, but hospitality loans may require more documentation when you work with a traditional lender. However, some lenders specializing in small business loans have moved away from traditional criteria and funding speeds for hospitality loans. They focus more on your present and future financial health, like revenue, than your credit history. And with streamlined underwriting, you often can secure same-day financing.
How to Choose What’s Right for Your Hotel
Now that you understand the basics, the real decision comes down to your needs. Consider what is most important to you as we compare each product.
Funding Speed
Depending on the lender, the funding amount, the financing products, and your application, you can secure a same-day hospitality loan. However, an MCA almost always gives you access to capital quickly.
Choose a cash advance if facing an emergency or a time-sensitive opportunity where speed is critical.
Repayment Terms
With a hospitality loan, you make monthly repayments with fixed or variable interest rates over one to seven years. This payment structure gives you predictability but may strain your cash flow if occupancy drops.
Making payments as a percentage of your card sales means an MCA flexes with your seasonal revenue. However, with 18-month terms and part of your daily sales going to the lender, a transaction dip can tighten your profit margins or stick you with a remaining balance.
Neither product’s repayment terms are perfect. The right option depends on your cash flow, profitability, and risk tolerance.
Cost of Capital
Lenders typically offer competitive interest rates for hospitality loans. You also may have the option of spreading borrowing costs over an extended repayment period, so your annual percentage rate is reasonably low.
Due to factor rates and short repayment periods, a merchant cash advance may come with a higher price tag.
If your priority is cutting costs in the long run, choose a hospitality loan.
Documentation and Requirements
Traditionally, a hospitality loan has required full financials, a good credit profile, and collateral for large funding amounts. But you can secure funding with a less-than-perfect credit score and minimal documentation from small business lenders. Their simple applications focus on strong revenue patterns.
An MCA requires basic documentation, like bank statements and credit card processing reports, and doesn’t focus on perfect credit scores. Providers streamline the application and underwriting for fast approvals.
An MCA is generally your best choice if you struggle to qualify for long-term traditional loans. The application for a cash advance can be fast and straightforward, and you may be able to secure funding quickly.
Plans for Financing
Hotel owners often use both tools for different situations. If your financing goal is growth, refinancing, or renovation, a hospitality loan provides stability. If your need is urgent, unpredictable, or short-term, an MCA gives you agility.
You can generally lean on an MCA for speed and hospitality loans for scale.
When Should You Use an MCA?
Think of an MCA as a cash flow shock absorber. It’s ideal for unexpected opportunities or when you need to recover quickly, but not just for emergencies.
Say a business convention needs a last-minute location to house speakers and host events. To take it on, you need to improve the furnishings in your event center and increase your staff. An MCA allows you to secure the necessary funds in time for the convention. And the resulting income pays off the majority of the financing.
When Does a Hospitality Loan Work?
This type of loan provides structured funding for significant improvements or refinancing rather than last-minute repairs. Suppose you’re ready to improve accessibility around your motel or redo the plumbing on the third floor. You could secure the necessary capital through a hospitality loan and spread the costs into predictable and manageable payments.
Solid Decisions for a Fast-Moving Industry
The hospitality world constantly adjusts to seasonal travel, customer preferences, economic trends, and environmental factors. The whirlwind of changes and decisions you make to keep your hotel competitive can make you feel rushed and dizzy.
But even when you need financing as fast and flexible as the hospitality business, you can choose a solid funding option. Consider the details of an MCA and a hospitality business loan, compare them to your needs, and choose the financing that supports your goals. The solid financing decision is the one that works for your business.
