Starting A Vacation Rental Business? 5 Financing Options To Consider

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After a few years of being shut down due to the pandemic, the vacation rental industry is starting to open its doors once again.

In fact, according to a report, the US short-term vacation rental market has officially recovered since April 2021. Short-term rental demand increased by over 60% in April.

The US vacation rental industry is expected to reach $17 billion this year. It’s also estimated to have an annual growth rate of 3.62% which can result in a projected market value of up to $20 billion by 2026.

With the vacation rental industry booming, you might be considering getting a piece of the pie. Whether you’re planning to rent out your own property or thinking of purchasing vacation rental properties, you’ll need funding.

Here are some financing options you can consider:

1. Bank Loans

Traditional bank loans are the first type of funding option for any business that typically comes to mind when hearing “small business loan”.

Bank loans are available in numerous forms and can be used for a wide variety of purposes including the purchase of vacation rental properties, property renovation, working capital, equipment purchasing, and expansion.

These loans may be unsecured or secured with collateral and can vary in interest rates. That said, getting approved is not easy. You need to demonstrate stability – for instance, in the form of revenue.

As for the best place to get a bank loan, that depends on your business needs. Every bank has its own set of loan offerings and requirements.

2. SBA Loans

Finding online business loans will likely make you encounter the option to apply for a Small Business Administration loan. A popular subtype of both bank loans and online lenders, a large portion of an SBA loan is secured by the SBA. It is a government agency providing resources and information to entrepreneurs to help them develop and establish strong businesses.

Like bank loans, though, SBA loans are difficult to get due to the strict requirements. To qualify, you need to have a measurable cash flow, a decent credit score, and a solid business plan among other qualifications and we are not talking about valuable rocks.

Regardless, an SBA loan is an attractive funding option for vacation rental business owners since it can offer a lot of options and flexibility in terms of how the funds are used.

3. Angel Investors

In general, an angel investor is a wealthy individual or retired company executive who invests directly in small businesses owned by others. They are usually leaders in their own field who contribute their network of contacts and experience as well as their technical and management knowledge.

Angel funders can help finance your purchase or renovation of your vacation rental properties, offering to fund USD$25,000 – USD$100,000. In exchange for risking their money, angel investors reserve the right to supervise your rental business’s management practices.

Take note that angel investors usually keep a low profile. You can only meet them by contacting specialized associations or a search website on angel funders.

4. Venture Capitalists

Like angels, a venture capitalist is another option for funding your vacation rental business.

VCs are investors who can provide you with the funds needed to start your vacation rental business for a percentage of the equity share of your business.

Other than simply funding your business, they also provide guidance and expertise. They help you at every stage and provide a professional evaluation of your vacation rental business and its progress.

They also have an extensive business network and can help connect you with the right people, providing your business with opportunities to boost your small business growth.

The only difference they have against angel investors is that they provide a larger amount of funding, about USD$500,000 – USD$1,000,000. They are also the best option if your vacation rental business is beyond the starting phase and fit for expansion.

5. Grants

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Unlike loans, a grant is a financial reward that you don’t need to pay back. You can apply for a grant even if you have bad credit or your vacation rental business has little to no financial history.

This is most suitable for entrepreneurs who live or want to invest in economically-distressed areas and are more likely to receive grants from local and federal government entities.

Grants are usually awarded to businesses that create housing and economic opportunities. In simpler terms, if you want to establish a vacation rental business in a secluded beach area that can help boost the community by attracting tourists, applying for a grant can be worthwhile.

Start by searching and contacting nonprofits or government agencies in the area. Then research their funding requirements and if you’re eligible for the grant. Then, carefully study the type of information you want to include in your grant proposal. Every government or nonprofit agency will have specific details. Some may prioritize the promotion of the area while others want projects that create jobs.

Take Away

A vacation rental business is an exciting and lucrative venture that can provide you with passive income for years to come. However, starting a vacation rental property will require significant financing. Fortunately, there are several paths you can follow to find and raise the funds you need.

Make sure to learn more about each of the above financing options to find the one most suitable for your needs.

Andrew Brown
Andrew Brown, an MBA graduate from Columbia University, New York, has been a fixture in the business world for over 20 years. His expertise in strategic management has been a cornerstone of our content since he joined in 2016. Previously, Andrew held executive roles in several Fortune 500 companies, where he led transformative business initiatives. His years of experience in corporate leadership and consulting bring a wealth of knowledge to our readers. Outside of work, he mentors young entrepreneurs and enjoys playing chess.

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