Many banks and credit unions consider hospitality lending to be a niche market for lenders who have particular expertise in the sector. They see the hospitality industry as riskier than others, and so they avoid it. But you should know that, as an asset class, hospitality lending has in fact proven to be one of the most successful lending lines in banking—in terms of both total return and customer profitability.1 Financial institutions can “de-risk” and demystify hospitality lending by getting to know the sector and its borrowers, and by adopting some technology tools that can help ease the lending process.
Get to know the sector
According to Chris Nichols, chief strategy officer at CenterState Bank, a typical hospitality borrower currently generates a cumulative lifetime value of approximately $510,000, yielding an 18 percent economic risk-adjusted return on equity. The average probability of default is 2.82 percent, Nichols says, and the expected loss is 0.56 percent. The hospitality industry’s stability since 2009 has reduced its volatility significantly, resulting in a stressed return on equity of 5.9 percent.
Big Four accounting firm Deloitte confirms Nichols’ optimism in its 2018 analysis of the hospitality industry: “While strong post-recession gains appear to be cooling off, the hotel sector is projected to sustain strong 5-6 percent growth throughout 2018, setting up the industry to hit a record-breaking $170 billion in gross bookings.”
Even amid these optimistic reports, financial institutions may still be wary of the fact that a wide range of factors play into a hospitality loan, such as the applicant’s previous experience, the local market, the competition within that market, and more. Getting to know the sector itself—and its promise of profitability—can help to clarify which factors you need to examine most closely.
Get to know the borrowers
In addition to becoming familiar with the hospitality sector, banks and credit unions that decide to undertake hospitality lending should determine how to assess potential borrowers so they can feel comfortable extending them credit. For each applicant, work to find out the reason or story behind the individual borrower’s needs or requests. A familiarity with the sector should lay the groundwork for these conversations fairly quickly, since the borrower will not have to spend a lot of time explaining the hospitality industry and/or market to the lender as he or she begins the loan application process.
Use technology to simplify and streamline
No matter how familiar the financial institution is with the sector and/or the borrower, hospitality lending is typically a complex process. Much of that complexity, though, can be simplified and streamlined—for both the lender and the borrower—through technology. Tools that centralize and digitally organize the data and documents required for loan application provide lenders a loan request that’s well prepared and easily digestible. The best of these tools also reflect what lenders look for and gather that information from borrowers just once, preventing them from having to repeatedly provide the same information to different departments within the institution – or to different lenders for the same loan request.
Worth the risk
The hospitality industry is a cyclical one, but its fundamentals have remained strong for a number of years. No lending line is without risk. Solid knowledge of the sector, personal interaction with borrowers, and the effective deployment of technology can go a long way toward assuring banks that the risk in hospitality lending is worth the return.