B&B Financing in 2009 and 2010

B&B financing is going to be exceedingly difficult in 2009, and probably well into 2010. Sellers are going to have to be willing to be more flexible. At the beginning of 2009, the recession is deepening and almost all loans to small businesses – including B&B’s, are becoming less and less available. So, the questions which might be asked are, is there actually money to lend, and if so, wouldn’t the SBA be able to help?

Yes, there is money to lend, especially at many of the community banks which did not take hits on their portfolios from bad sub-prime loans and who are also gaining deposits from larger banks that are in trouble. But even though it’s true, banks are not lending except to the very strongest deals – ones showing strong cash flow, substantial down payments for acquisition, and management experience. Financings are getting done and will continue to be, but it will take strong deals to do it. Even so, money is generally not available for refinancing of B&B’s right now.

There is one other thing that I should also emphasize here. Properties generally five or six rooms and less, are highly unlikely to be financed by commercial lenders because the transactions are simply too small. This is going to make properties like this harder to finance in today’s market. In the past three or four years a lot of acquisition financing was provided by residential lenders. Most of these lenders have now headed to the exits.

What about the SBA?

Unfortunately, SBA only guarantees loans – they don’t make them. So if the banks won’t make SBA loans, the SBA guarantee doesn’t do anything. A lot of banks do SBA loans, but last year, the vast majority of banks that are licensed to do them made one or two, if any. And this especially includes the community banks which generally do have funds available and are often in areas where they know the specific property or the innkeeper. But they won’t do SBA loans because they are too paperwork-intensive, and they just are not set up to handle them.

There are one or two non-bank SBA lenders (as of February, 2009) who are still making B&B loans because they understand them; but like banks, they are only doing the blue-chip deals — cash flow, substantial down payments and lodging or related industry management experience.

How Long Will the Economy Affect Small Business Lending?

The lending market for small businesses will not begin to significantly improve probably until the first quarter of 2011, and B&B’s are classic small businesses. The economy is going to worsen until probably the third quarter of this year, so the turnaround, when it starts, will be from an even lower bottom than where we are now. It is going to take at least until the third or fourth quarter until whatever stimulus package is passed can begin to take effect, and then these effects will not even begin to start making a difference until well into 2010. Plus, it seems that almost every few days another piece of bad news shows up making it even less likely that banks are going to start lending to small businesses any time soon.

Also, small business lending always lags improvement in the economy and increases in lending to stronger larger businesses. Since small business loans are always riskier loans to banks, they are probably going to want to feel a little surer that the economy is actually moving forward so that there is less risk of a small business borrower’s not being able to pay back a loan.

There is one factor may help to loosen lending a little sooner, and that is that banks are continuing to accumulate new deposits, especially from people moving away from the larger banks. And money not loaned out by a bank is income lost. When a bank has to pay interest on a deposit but does not have interest coming in from a loan, the more money it loses, and the more likely it may be to start lending.

The Light at the End of the Tunnel

That gloomy scenario having been presented may actually benefit those looking to purchase an inn to create a strong and growing business. Everything points to less far-flung travel in the next two or three years, so bed and breakfasts will become a more attractive alternative. Plus, the bad economy over the next two or three years will probably cause some owners who did not come into the industry with a high profit motive to close their doors so there could more business for remaining inns in a time of potentially increasing occupancy rates from people staying closer to home. And because more and more inns are either being or soon will be priced to sell, it creates an excellent buying opportunity for buyers with cash and management experience to acquire some excellent properties.

So, Now What?

With the lending climate that is going to exist for approximately the next two years, the probability is that if a B&B is going to get sold, the seller is going to have to hold some portion of it as a second mortgage.

Here are some possible scenarios:

1. Borrower is able to get a loan

Suppose the property was for sale for $800,000

Borrower can get a $400,000 loan

Has 25{5c84b89e0cba74b6d8cdc777bf9a8338d14dd91243071983e74bc62a6792d410} down — $200,000

Gap (second mortgage) – $200,000.

But at least in this scenario, the seller walks away from the table with a substantial piece of cash — $600,000.

2. Same situation except SBA loan for $400,000; buyer has the 25{5c84b89e0cba74b6d8cdc777bf9a8338d14dd91243071983e74bc62a6792d410}

If the seller holds the $200,000 as a second, in order for SBA to approve it, it must be on full standby for the life of the loan – no payments (interest can accrue). This allows SBA to consider the $200,000 as equity, so the lender now has a 50{5c84b89e0cba74b6d8cdc777bf9a8338d14dd91243071983e74bc62a6792d410} LTV. You still walk away with $600,000

3. No loan is available; must be totally seller financed

If the property has to be sold and this is the only way, I would recommend a minimum 20 or 25{5c84b89e0cba74b6d8cdc777bf9a8338d14dd91243071983e74bc62a6792d410} down payment from the buyer. This makes it very difficult for the buyer to walk away if things are not going well. Besides, 20 or 25{5c84b89e0cba74b6d8cdc777bf9a8338d14dd91243071983e74bc62a6792d410} is what a lender is probably going to ask for, so if possible, so should you. So you get away with $200,000.