March 6th 2023.
What are Hard Money Business Loans?
A hard money business loan is a form of financing that is backed by real property as security. It is different from regular business loans in that the collateral is the main factor for approval instead of conventional prerequisites such as personal credit scores, time in business, and yearly income.
A further distinction between hard money loans and traditional business loans is the supplier of the funds. Hard money loans are funded by individual investors or companies, rather than traditional financial organizations like banks and credit unions.
These short-term loans originated in the real estate sector, where investors would take out a loan to finance renovating a property to resell. Property investors utilize these loans when they do not have the cash reserves to flip a property on their own. In principle, a real estate investor would purchase a property with a hard money loan, make use of the property as collateral, restore it, and then sell it for a profit and repay the loan.
Hard money loans in business work in a similar manner where any commercial or private property the company owns serves as security. The company then pays off the loan with upcoming profits.
How do Hard Money Loans work?
Acquiring a hard money loan necessitates working with a private lender or company. The amount you receive is based on the value of your collateral.
Loan-to-Value
A loan-to-value ratio is the percentage of the collateral's value that you receive as the loan amount. Hard money loans tend to have a lower LTV than traditional loans.
Banks and credit unions might loan you 80%-90% of the collateral's face value. Hard money loans might have an LTV of 65%.
For instance, suppose you are taking out a hard money business loan against real property evaluated at $150,000. The hard money lender would then issue you a loan for 65% of that worth, or $97,500.
Down Payment
Most hard money lenders require a down payment anywhere from 15%-30%. If you have an established relationship with the lender and have successfully repaid hard money loans, they may waive the down payment.
Interest Rates & Other Costs
Hard money business loans usually carry higher interest rates than conventional loans to compensate for the lender's risk. The loans are more dangerous for the lenders, and they charge more to help reduce that risk.
Lenders charge interest rates of anywhere from 7%-20%, with fees that total anywhere from 1%-10% of the loan amount. Origination fees vary between lenders.
Loan Proceed Disbursement
Most hard money loans are disbursed as a single lump sum. However, some lenders may structure the loan as a line of credit.
Repayment
Hard money loans are short-term financing, meaning you're generally expected to pay the loan off in less than 24 months. Terms can be as short as 4 months.
The short repayment period implies you'll have a larger payment due. Repayment schedules can be monthly, weekly, or daily.
Where can I get a Hard Money Loan?
It's generally private companies or investors that offer hard money loans. They're typically flexible and can move quickly on loan decisions and invest in your business opportunities. Many hard money lenders are local companies or investors, but some operate nationally.
You can find hard money lenders with a quick internet search. You can also contact business owners to find other hard money lenders. Nonetheless, you should be careful when selecting a private lender.
The best practice would be to contact several private lenders to compare hard money lending options. If possible, look for other business owners or property investors who have worked with that lender. The best hard money lenders will be transparent about their costs.
What are the advantages of Hard Money Loans?
On the whole, hard money loans carry hassle-free applications with minimal documentation requirements. Since the value of the property used as collateral is the fundamental factor for approval, you don't have to provide as many documents for income verification.
These loans don't require high credit scores, a long time in business, or high annual revenue. Once more, the value of your collateral is the most essential thing hard money lenders look at when approving loan requests.
It's also possible to get funds faster than with conventional loans. You could potentially get your money in just a few days. This is particularly true when using a hard money loan to purchase a property. lenders are not subject to the same waiting periods that a mortgage lender must follow.
What are the disadvantages of Hard Money Loans?
These loans typically carry higher interest rates and fees than traditional business loans or commercial mortgages. The loans are regarded as riskier, and you typically get a higher interest rate. Furthermore, hard money lenders are not subject to the same regulatory standards as traditional lenders.
The risk also applies to the borrower. The property they use as collateral is at risk because the lender will claim the collateral if the borrower defaults.
Hard money business loans also tend to have a lower LTV than other forms of traditional financing. The lower LTV means you'll get a loan amount significantly lower than the value of the asset you're putting at risk.
Most hard money loans also require a considerable down payment and closing costs. It can be difficult to assemble that kind of cash upfront.
The increased cost and short repayment terms combine for larger monthly payments that can strain your cash flow. Some lenders may help you reduce your monthly payment by making interest-only payments or interest plus a small percentage of the principal. However, you would then have a large balloon payment due at the end of the loan term.
Hard Money Loan Pros & Cons
Here's a quick summary of the advantages and drawbacks of hard money business loans.
Pros:
Straightforward applications with minimal documentation.
Can get approved with a low credit score.
Quick turnaround times on approval and receiving loan funds.
Cons:
High interest rates and fees compared to conventional loans.
Risky way to borrow money.
Lower LTV than other forms of asset-based financing.
Might require a sizable down payment.
Short-term financing with either high monthly payments or a balloon payment.
What are the advantages of Hard Money Loans?
Hard money business loans offer an easy application process with minimal documentation requirements. These loans don't need a high credit score, a long time in business, or a high annual revenue. The loan can be approved quickly and funds can be received within a few days.
What are the disadvantages of Hard Money Loans?
Hard money loans usually have higher interest rates and fees than traditional business loans or commercial mortgages. The risk is greater for the lender and they charge more to mitigate that risk. Additionally, these loans are not subject to the same regulatory standards as traditional lenders. The borrower is also at risk, because the lender will claim the collateral if the payment is not made. The loan-to-value ratio is also lower than other forms of asset-based financing, and a sizeable down payment and closing costs may be required. The repayment schedule is also short-term, resulting in larger monthly payments that can strain cash flow.
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