Financing

Where to get the money to start your hostel is one of the biggest stopping points for a lot of people.

Most people pack away as much as they can from side jobs or previous careers to build up initial funding.  It may be worth taking on a well-paying job temporarily while you work on your business plan so you can save up as much as possible.  It’s not unheard of for people to sell off their cars or other valuables to generate startup cash.  You will probably need to invest quite a bit of your own money before anyone else will give you any, because they want to see that you are committed and personally invested in the project before they agree to get on board and throw in their own funds.

Then they hit up all of their friends, family, and members of their local community to see if anyone is interested in investing, loaning, or donating to a beautiful dream or an extremely well thought out business plan (depending on which pitch is more convincing for the individual).  It’s a good idea to hit up these people first, because other investors are going to want to see that the people closest to you also believe in what you’re doing and contribute to it.  This money gives you some initial credibility for outsiders who will look more critically at your business plan and funding scheme.

While most people don’t recommend it, you can use credit cards to make initial purchases like beds and appliances.  This is an option if you are very confident that you could set up quickly and generate income immediately.  Be careful though! Compound interest will destroy your business if you leave a balance on the cards for any length of time.  

Owner financing from the building owner might be a possibility.  This could come in the form of the owner paying for initial renovations and you pay this back through higher monthly rent.  Or this could mean that the owner lets you buy the building and pay them directly in multiple payments over several years from the money the hostel generates.

Buying an existing hostel with a similar deal to the owner financing above could be a possibility, too.

Working out a barter deal with a landlord or investor could be another possibility if you have special skills that could benefit them.  Could you do their taxes? Support their whole IT network? Provide legal services? Babysit their kids? Paint a mural in their home?

Some people have tried crowdfunding through sites like Kickstarter.  I’m not sure how successful the efforts have been for opening a hostel from scratch, so if someone else has had a positive experience they would like to share it would be great to hear about it!

SBA guaranteed loans could be an option for a hostel in the US.  It still involves borrowing money, but the amount that you have to come up with at the start might be significantly lower than just walking into your neighborhood bank or credit union.

You could look for local angel investors or angel investor groups who might like your idea and want to give you money as well as their support and advice with business management.  

There might also be government grants available for some of the activities that you could potentially combine with the hostel.  Could you build in an educational component or some kind of social responsibility program?  Maybe you could team up with a local university professor to write the grant proposal?  Similarly, sometimes grants are given to young entrepreneurs, minority business owners, or businesses that are started in underdeveloped parts of town. Check out grants.gov to see if there is anything that you could be eligible for.  

Finding like-minded business partners can significantly reduce the amount of capital that each of you has to provide to get the hostel off the ground.  It can also provide an initial workforce who won’t expect an hourly paycheck when the beds sit empty and who will be motivated to find ways to fill them in those situations.  Plus you each bring in different talents and resources that can be applied to the business.  Just be sure to have some very long discussions about what you want to get out of the hostel, what you think makes a great hostel, how much time you want to spend working on the hostel, and how much time you want to spend away from the business before you agree to partner up with anyone.