13 Sep Hard Money Commercial Lending
A poor credit rating might prevent you from getting the cash you need for your business. But there are other options for entrepreneurs who can use real estate or other assets as collateral. If you don’t qualify for a traditional business loan, then hard money commercial lending might be an option for you.
What is Hard Money Commercial Lending?
Hard money commercial lending is when you take out a business loan by offering up collateral to the lender. Also known as hard money business loans, these types of loans aren’t based on creditworthiness. Instead, they’re usually secured by hard collateral like real estate.
The disadvantage? Hard money loans come with higher interest rates and an unusually short repayment schedule (usually between 1-5 years). In other words, they can be risky. Unless there’s a sure plan to pay it off quickly, it can sometimes be difficult for borrowers to pay off.
Traditional lenders typically won’t offer these types of loans. Usually, you’ll get hard money lending from private investors, banks, and mortgage lenders.
Why Choose Hard Money Loans?
Hard money loans are an option when other loan options aren’t available. If you’ve used up your lines of credit or can’t qualify for another loan fast enough, this is an option for you.
You might be a candidate for hard money commercial lending if you’re one of the following:
- Business owners with low credit scores
- A new business that’s just getting started
- You simply need cash in a relatively short time period.
Entrepreneurs who own real estate of any kind are more likely to get approved for hard money loans. Since hard money commercial lending can be precarious, lenders will minimize those risks by requiring the borrower to secure the loan with hard collateral.
That way, if the borrower defaults or stops making payments, the lender can take the collateral then sell it off in order to make the money back.
Hard Money Commercial Lenders
These are private individuals or businesses that have funds available for investing. They’re usually more flexible than other lending sources. This allows them to move quickly and approve loans outside of the strict criteria and bureaucracy of more traditional lending institutions.
For some businesses, this is a godsend. The speed at which hard money lenders move allows them to quickly take advantage of an opportunity before it’s gone.
How to Qualify for Hard Money Commercial Lending
Your credit score usually isn’t taken into consideration when applying for a hard money loan. Your loan amount is based on the collateral you can offer.
The entire value of the collateral is hardly ever used. Instead, the loan amount is calculated based on the percentage of the property’s value. In other words, if the collateral you offer has a high value, then you’ll qualify for a bigger loan. Usually, this is somewhere between 50-80% of the collateral value.
For example, if you own a $100,000 property and put that up as collateral, the hard money lender will lend you between $50,000 and $80,000.
While real estate is the most common type of collateral used in these exchanges, hard money lenders might also be willing to secure other assets like stocks, bonds, or precious metals.
Benefits and Drawbacks of Hard Money Commercial Lending
Just from their nature, these types of loans contain slight risks. With that said, there are notable advantages to hard money commercial lending.
Hard Money Loan Advantages
The most obvious advantage is that you don’t require a good credit score to get a loan. As long as you have a liquefiable asset, you should have no problem getting approved.
The approval process for hard money lending is a lot faster than with other loans. Since private lenders have more flexibility than conventional banking firms they can speed up the whole process.
Aside from getting money quickly, this benefits borrowers who only need the money for a short period of time. The payment terms for these loans are generally shorter and can be a better option for many businesses.
Hard Money Loan Disadvantages
Despite the obvious benefits to entrepreneurs, there are some drawbacks.
The most obvious drawback is that hard loans are expensive. Interest rates are almost always higher than what other banks will offer. They can also contain other fees you weren’t expecting if you didn’t read the agreement thoroughly.
Then there are the shorter repayment periods. This can be somewhat risky to the borrower if they can’t pay off the loan on time.
Not only is the borrower risking a lot with the loan, but the lender is as well. That’s why there’s collateral. If the borrower defaults, the lender can take the asset from them. This ensures that the lender will get their money back one way or another.
That puts the borrower at a slight risk. They stand to lose their property if they can’t pay the loan in time.
Are Hard Money Loans Right for You?
Hard money commercial lending can be risky to both parties involved.
Something to consider is that private lenders are more likely to loan money to established business owners with better cash flow. If you’re an entrepreneur with a few years of experience and you have enough collateral, this could be an excellent option for you.
For some entrepreneurs, hard money loans could very well be the key to their success. If they foresee a guaranteed return on investment, then it just makes sense.
But others will have to have to do some heavy evaluation and weigh out the risks before pulling the trigger. In most cases, hard money lending should be approached after lots of consideration.
If you’re a Utah business owner looking for a business loan, there are multiple options available to you. Reach out to Nelson Funding and we’ll help you come up with a financing plan that’s right for you.