The Definitive Guide to Hard Money Business Loans
June 11, 2020 | Last Updated on: July 22, 2022
June 11, 2020 | Last Updated on: July 22, 2022
Hard money business loans are a form of lending in which the borrower uses collateral to secure the loan. The collateral is often real estate property, and so these loans may also be referred to as asset-based loans. Hard money business loans may be good options for borrowers who need money quickly to make an investment and can expect immediate return from that investment.
Hard money loans, or asset-based loans, are common in the purchase of new property, corporate purchases, or other large expenses where liquid capital is needed fast. Here is how hard money loans work.
Small businesses in need of an expedient loan sometimes need to find funding outside of the traditional forms of financing.
One option for a company when it needs capital fast is to look for a hard money loan. Because securing financing from traditional sources can often be an excruciatingly cumbersome and drawn-out process, a business that needs funding sooner rather than later might find appeal in the prospect of a hard money loan.
As slow as standard loan applications can be with traditional lenders, such as banks, the process becomes even more complex and may take even longer if the applicant does not have especially strong credit scores or a good credit history. Those things only exacerbate the situation for a business that needs money now, or very soon.
Short-term loans that often are associated with the purchase or refinancing of real estate, hard money loans frequently are given by investors with knowledge of the real estate market who are seeking a high rate of return on their money. A lender who grants a hard money loan is usually going to charge the borrower a higher rate than a traditional lender would.
These asset-based loans are distinguishable from other types of loans in that the lender makes a decision on financing based primarily on the purchase and sale of a property as opposed to the borrower’s credit and financial history. Hard money loans could come with very high rates. For those asking with trepidation, “What are the interest rates on hard money business loans?”, be prepared to pay as much as between 12% and 18%, with anywhere between two and eight points payable at the closing.
Hard money loans for business entail the borrower putting up real estate property as the collateral. While there are higher rates and bigger down payments with a hard money loan, the upside for those who can handle those variables is that there are considerably fewer hurdles in getting a hard money loan.
Traditional lenders are more likely to carefully inspect and evaluate a borrower’s ability to pay back the loan by looking at his or her credit history, FICO credit score and debt-to-income ratio. This isn’t to say that a hard money lender will completely overlook these factors, but they will still base the borrower’s candidacy primarily on the value of the property–which is usually going to serve as the collateral for the loan.
The higher fees and sometimes exorbitant interest rates could make the hard money loan a challenge to repay, especially in tandem with the large down payments that are usually associated with hard money financing.
Hard Money Loans are ideal for:
A business setback or an unforeseen medical expense could put someone’s credit rating in arrears. Someone about to declare bankruptcy or someone who has endured a property foreclosure may seek a hard money loan. Lenders are not as likely to require a waiting period with a hard money loan as traditional lenders would with other types of financing. Hard money loans, even for someone with bad credit, can be secured in as little as a week or two, compared to 30 or more days with traditional loans.
There are lenders of hard money who are willing to risk approving a loan to someone who either does not have good credit, or one with little or no credit history at all. Their decision is based on the property itself rather than the reliability of the applicant.
Investors of property who are skittish about the concept of forking over a sizable amount of cash up front for a real estate purchase might prefer to seek the money through a hard money loan instead. Investors who buy property to “flip it” by renovating it and then selling it after a short time for a profit are candidates for a hard money loan. A hard money loan is based on the value of the property being loaned against without the quality of the borrower’s credit being considered.
Commercial real estate developers look for returns of 10 percent or more on their investment, and while other financing options for them include traditional bank loans, equity offers and marketplace loans, a hard money loan might have more appeal to such a purchaser because of how quickly such a loan can be processed. Hard money lenders usually charge points—a percent of the loan amount—to be paid prior to the first payment installment. Two to four points per loan is a common range. The increased risk to the lender entails shorter loan terms, which typically do not extend for more than two years.
Someone attempting to purchase property at a foreclosure or a tax auction usually necessitates cash within a short amount of time if he wishes to stand a chance of competing against rival offers. An aspiring buyer who does not have the cash on hand to cover the whole price of the bid might be able to raise the difference and cover the cost via a hard money loan because of its relative expediency.
A person with short-term financial needs can meet those requirements with a hard money loan. Some hard money lenders will supply financing on more than one property if the person in need of the loan does not have enough equity in a single property to cover the amount needed.
The interest rate on a hard money loan tends to be higher, and there also are higher fees involved. That’s a tradeoff that some business owners are willing to endure due to the shorter duration of the loan.
Interest rates on a hard money loan are directly correlated to the level of risk perceived to be involved with the financing. Hard money loans often entail fees that are expressed as “points.” Each point represents a percentage point of the loan amount, so a hard money loan in the 3-point range translates into 3 percent of the loan amount.
Depending on the lender, some other fees might also be added for processing documents or underwriting.
It’s important that a small business owner seeking a hard money loan do his homework and not fall into the potential trap of opting for the first lender he or she finds. Don’t let the temptation of a quick fix lead you to a loan shark.
Despite its attendant high interest rates, hard money loans remain an attractive option for many borrowers. Some of the advantages of a hard money loan include:
A hard money loan may be considered a form of a bridge loan, but not all bridge loans are hard money loans.
A bridge loan for a business can help a company owner get his or hands on cash in an expedient manner when there is a present shortfall in cash while expenses remain particularly pressing. While the term “bridge loan” is commonly associated with home buying, it’s also applicable to the operation of a business. Sometimes, a business owner must land a bridge loan in order to continue operating on a day to day basis and pay the bills while awaiting greater long-term capital that has not arrived yet. A bridge loan is a short-term loan that “bridges” the time between when one buys an asset and when they can put permanent financing on it.
Some investors turn to hard money for their temporary financing. Investors use bridge financing for short-term capital needs. Hard money lenders make loans with money that comes from private investors. Hard money loans carry fees and interest rates higher than normal long-term financing. Both bridge loans and hard money loans are options when conventional commercial loans are not feasible. Hard money loans are sought for a specific purpose, while a bridge loans can typically be used for a multitude of reasons.
A budding small business may need to seek and secure a hard money loan early in the game to establish the company, its credit, and its reputation. Once a business becomes more entrenched, its credit history becomes more established and that will create avenues to more traditional forms of financing for future projects.
It can be more affordable for a small business to start out with hard money loans, and then as the company becomes more established, it can start seeking more conventional mortgage loans, business loans and construction loans. Qualifying for mainstream financing options starts with either building or repairing one’s personal and business credit score.