Hard Money Loans for Businesses
Hard Money Business Loans: An Overview
There are numerous organizations and individuals eager to lend to your business these days, from large bank lenders to alternative finance providers, regardless of your qualifications.
Small business owners with bad credit or little experience in the industry now have more funding options than ever before. Hard money business loans are one of these funding choices, which are designed for business owners who do not qualify for regular business loans.
But, what exactly are hard money loans, and how can you determine if they’re right for your business?
This tutorial will assist you in answering those questions.
We’ll go through how hard money loans work, who qualifies for them, and which types of lenders provide them. We’ll also go through the benefits and drawbacks of hard money business loans, as well as some of the best alternatives, so you have all the information you need to decide if this type of financing is suitable for you.
What Are Hard Money Business Loans and How Do They Work?
Hard money business loans, in its most basic form, are loans secured by your business’s commercial real estate, which can comprise property and land. Hard money loans, which rely substantially on collateral, are intended for business owners who are unable to obtain other types of small business finance.
Hard money loans are preferred by startup business owners and those with weak credit since they are easier to obtain. Hard money business loans, on the other hand, are particularly problematic for these types of business owners because they’re pricey and hence tough to repay.
What Are Hard Money Loans and How Do They Work?
To begin, it’s vital to realize that, while hard money business loans are those obtained by business owners, this type of loan is not limited to businesses; consumers can also obtain hard money loans.
Hard money loans are available from a range of sources, including alternative lenders, private individuals, and private funding groups, to business owners. Hard money loans, unlike standard business loans, are totally asset-based, meaning they are secured by the value of an asset, such as your business’s property or land. In other words, hard money loans are a sort of secured business loan in which the collateral is commercial real estate. As you may be aware, the real estate you use as collateral serves as a form of security for your lender—if you default on the loan, the lender will be able to seize your property to recoup the money you owe.
Overall, these loans are deemed significantly riskier than conventional loans because they are so reliant on collateral and attract less-qualified consumers. As a result, hard money business loans will have higher interest rates than other types of funding and will frequently expect quick returns, making them difficult to repay.
How to Apply for a Hard Money Business Loan?
Hard money business loans are not based on a borrower’s creditworthiness because they are asset-based loans. Rather, your ability to qualify for this loan is solely determined by the amount of collateral you can provide to your hard money lender.
Having said that, your eligibility isn’t usually determined by the total value of the collateral. For your hard money business loan, a loan-to-value ratio is determined instead.
The loan-to-value ratio is a proportion of the property’s value that lenders use to assess how risky it is to give you a loan. The higher the percentage, the larger the danger for the hard money lender, and thus the more difficult it will be for you to obtain a loan. However, because a hard money business loan is backed by a substantial quantity of collateral, you should expect greater loan-to-value ratios with these loans.
For example, if you have $100,000 in collateral, a lender will not want to give you a $100,000 loan. Instead, they might make you an offer of $70,000. In this situation, your loan-to-value ratio is between $70,000 and $100,000, or 7/10, or 70%. Hard money lenders typically lend at this rate, delivering roughly 70% of the value of the collateral property.
With all of this in mind, hard money business loans are frequently referred to as bad credit business loans because they are based on the collateral you provide. Even if you have low credit, haven’t been in business long, or have other less-than-ideal criteria, you can apply for and be approved for this form of financing.
In this sense, hard money loans are considered as a “worst-case scenario” approach for funding a business—you might be able to qualify for a hard money business loan even if you can’t get any other sort of financing.
Lenders of Hard Money
You may be wondering where to look for hard money business loans, given that they are a non-traditional kind of funding.
Hard money lenders aren’t usually banks or trusted online lenders because of the nature of these loans.
Hard money lenders must have more flexibility than banks and other small business lenders because of the lenient requirements involved in evaluating and funding these loans. They can’t be held to the same strict regulations that banks and other small business lenders are when it comes to business loans.
Hard money lenders are typically private people, private fundraising groups, or smaller lending organizations who see the value in taking on such a hazardous project.
Are You a Good Candidate for Hard Money Business Loans?
As you can see, hard money business loans carry a significant amount of risk, far more than most other sources of financing.
Is a hard money loan appropriate for your business?
Finally, like with any form of business loan or financing choice, it’s important to weigh the advantages and disadvantages of a hard money loan.
Here are some advantages and disadvantages to consider:
The Advantages of Hard Money Business Loans
In reality, there aren’t many compelling reasons to use a hard money business loan as a source of funding. Nonetheless, there are three advantages to taking out these loans:
- Easy to qualify for: Unlike other small business loans, hard money business loans do not take your credit score into account. This means they’re far easier to qualify for, assuming, of course, that you have sufficient collateral to provide to the lender.
- It’s simple to apply for: Most business loans (especially bank loans and long-to-medium-term loans) demand a lot of paperwork throughout the application process. The application process will be uncomplicated because hard money lenders merely look at your collateral.
- Quickly fundable: This goes hand in hand with how simple it is to use. Hard money loans, on the other hand, are typically quick business loans, making them a viable choice to consider if you require funding right now.
The Disadvantages of a Hard Money Business Loans
Hard money business loans have a number of drawbacks that make them a last-resort alternative for businesses. Here are two significant disadvantages to consider:
- High risk: Hard money business loans, without a doubt, pose a significant danger to your business. This form of loan puts almost all of the value of your business’s assets on the line. As a result, if you default on your loan, your lender has the legal authority to confiscate your property in order to recuperate their losses. Furthermore, if your business assets aren’t substantial enough, a lender may need personal assets as additional loan collateral. If you can’t repay your loan, you could lose a lot of your business and personal assets in the worst-case situation.
- High-interest rates: Because hard money lenders are taking a big risk by lending to less-qualified borrowers, they’ll charge a lot of money for hard money business loans. The lender compensates for the danger of you defaulting on the loan by charging high interest rates. Hard money loans, on the other hand, might be even more difficult to repay than other types of business funding due to their high interest rates and short repayment durations.
Top Hard Money Business Loan Alternatives
For most business owners, hard money loans should be viewed as a last choice.
Because of the considerable drawbacks of taking out a hard money business loan, you’ll want to be sure you’ve looked into and exhausted all other, less dangerous funding options before considering these loans.
Having said that, if you’re searching for a hard money loan because you don’t think you’ll be able to qualify for most business loans, you might want to look into the following options, which have more flexible standards and could work for your business:
To begin, if you’re a B2B business that bills consumers for services, you might consider invoice finance.
Invoice finance allows you to obtain funding by pledging your outstanding invoices as security. So, if you need money because your business’s cash flow is being stymied by unpaid invoices, this is your best bet. Unlike hard money loans, which use your valuable assets as security, invoice financing uses simply your business’s invoices as collateral.
Invoice financing is also surprisingly simple to qualify for, as many lenders look at your customers’ payback records rather than your business’s qualifications. Furthermore, most online lenders allow you to apply for and receive invoice financing in as little as one day.Plus, while invoice finance may be more expensive than other business loan options, it will almost surely be less expensive than a hard money business loan.
For example, if you’ve been in business for three months, have a personal credit score of 530, and annual sales of $100,000, you’ll probably be able to qualify for invoice financing with BlueVine, an alternative lender.
Equipment finance is another way to get secured business funding without putting your precious assets on the line. Equipment financing, like invoice financing, is self-securing: it’s a loan that business owners can use to buy equipment that then serves as collateral for the loan that was used to buy it.
Equipment finance, unlike hard money business loans, does not need you to put up any external assets as security. Equipment finance lenders will also be ready to grant larger loans with longer payback terms and cheaper interest rates because the equipment will assist lessen the risk that the lender takes on by lending to you.
Of course, just like invoice financing, equipment financing is only an option if you need money to acquire something specific. If this applies to your business, you might be able to work with a lender like Currency Capital, which can fund equipment financing arrangements worth up to $150,000 in as little as 24 hours.
Finally, if you’re thinking about getting a hard money loan because you don’t think you’ll be approved for other options, you should look into your unsecured business finance options first.
Short-term loans, for example, are a type of business loan that does not require physical collateral and is available to a wide range of businesses. Furthermore, short-term business loans are often among the quickest-to-fund loan kinds available.
Short-term loans, unlike equipment and invoice finance, can be utilized for a variety of business needs and come in a variety of amounts, repayment terms, and interest rates.
As a result, before applying for a hard money business loan, you should look into your short-term loan choices to see if you can discover anything better suited to your needs.
Most Commonly Asked Questions
Are unsecured hard money loans available?
You won’t have much luck if you’re looking for unsecured hard money business loans.
Hard money loans are not unsecured business loans by definition. A hard money loan, as a reminder, requires you to put up real estate as collateral to secure the loan. As a result of the way these loans operate, all hard money business loans are secured.
Having said that, if you don’t qualify for traditional business loans but need unsecured funding, you might consider short-term loans from alternative lenders.
Is a down payment required by hard money lenders?
In the end, the answer to this issue will most likely be determined by the hard money lender with whom you’re working.
Because hard money lenders aren’t typically banks or other well-known alternative lenders, they’ll be more lenient in terms of what they want when funding a loan.
It’s possible that some lenders will want a down payment, but it’s also possible that others will not. In addition to your collateral, a hard money lender may consider your other criteria when deciding whether or not to require a down payment.
Given these lenders’ flexibility, it’s worth addressing these choices with them if you do wind up asking for a hard money business loan.
What are the hard money business loan interest rates?
The interest rates for hard money business loans will, once again, be determined by the lender you work with. Hard money loans, on the other hand, are expensive, and as a result, you’ll almost certainly notice considerably higher rates (and overall prices) than you would with other business funding options.
Hard money loans often have interest rates ranging from 8% to 15%, without including additional costs. On top of your interest rates, many hard money lenders impose points as origination fees. Depending on the loan terms, specific collateral, and other borrower qualifications, a lender may charge anywhere from two to five points (or 2% to 5% of the loan amount).
It’s also worth noting that, in addition to interest and origination costs, hard money lenders may impose a variety of expenses, such as document fees, processing fees, and underwriting fees.
At the end of the day, if you’re a less-qualified borrower who has established that no other business finance options are available to you, you might want to consider a hard money business loan.
However, we want to caution you that hard money loans are hazardous and expensive, and that if you can’t repay your loan, you risk losing significant business (and even personal) assets.
Furthermore, due to the nature of hard money loans, finding a reputable lender might be challenging. Whether you decide to use this method of financing, do some research to discover a reputable hard money lender. You may check to see if they’re registered with the Better Business Bureau and read reviews from previous clients.
Finally, you want to feel confident in your business financing decision, knowing that you can not only qualify for a product, but also that you can afford it, that you’re working with a reputable lender, and that you’ll be able to use it to meet your financing needs.
Content & Creative Writer | Blogger | Small Business Funding Advocate | Effective Communications | Entrepreneur |Traveler