Hard Money Business Loans
If you are looking for a hard money business loan there is a good chance that you do not qualify for traditional business loans. Shield Funding helps borrowers with existing businesses secure private business loans for any type of venture. Our application process is fast and secure and approved borrowers are eligible to receive funding in as fast as the same day.
So you think a hard money business loan is right for you and your business. Do you know everything you should about a hard money loan? If you know everything then great you can get started online in just a few clicks, if you want to know more let’s dive deep and explore hard money loans, their pros and cons, and whether this type of loan fits best for you situation. Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
What is a Hard Money Loan?
The primary feature of a hard money loan is that it is secured by collateral. This differentiates hard money loans from other business loans. As long as you have real property, usually in the form of a commercial or residential building or land, you can qualify for a hard money loan.
Since banks and traditional mortgage lenders are restricted by red tape and federal regulations, private lenders and individuals provide funding for hard money loans. Hard money loans also have shorter terms than other loan options—usually only a couple months to a few years. Due to higher risk, the interest rates are higher than a traditional mortgage or small business loan.
Hard money loans are often compared to bridge loans because they’re often used to buy property in foreclosure or distress. The loan supports the rehab, remodel, and upgrades; then, after a short time, the borrower sells the property for more than the original purchase price. The hard money loan bridges the time between the purchase and the sale. In an ideal arrangement, the borrower’s investment adds to the property, resulting in a flip for significant profit.
Collateral is key to a hard money loan. The lender spends less time looking at credit scores, credit history, and the borrower’s finances than a traditional lender. The hard money lender puts forth more effort into evaluating the value of the property since this value will be the basis for the loan amount.
Lower monthly payments are common with hard money loans, and this benefits the borrower. Hard money lenders allow interest-only payments or interest plus a small amount of principal. But the borrower should be aware that all hard money loans terminate with a large balloon payment. If everything goes as planned, the balloon payment should coincide with the expected sale or other profit windfall near the end of the loan term.
Hard money business loans may or may not be right for your situation, so you must consider all the pros and cons first.
Advantages of Hard Money Loans
Hard money loans have many advantages over business loans from banks and other mainstream lenders.
Fast funding can be the difference in an opportunity’s success and failure. Hard money lenders can turn a loan application into available cash in a matter of days. A mortgage lender may not even get through the initial review of your application in the same period of time.
Hard money lenders focus on collateral above all other factors. They don’t spend much time evaluating a borrower’s credit worthiness in the same manner as more regulated sources of funds. Lower credit scores and some negative marks in borrowers’ financial histories play a smaller role in the lender’s approval decision.
Since the loans are backed by real property, the value of that property is the number one factor in the lender’s approval and in the amount they will lend. In case of default, the lender must be assured that the proceeds from sale of the property will be sufficient to recoup the loan’s unpaid principal balance.
To some extent, even the borrower’s ability to repay the loan during the term is less important than other deciding factors. However, the lender must ensure the borrower can make the required payments. Paying interest only or interest plus a some principal will be far less than a normal loan payment.
Hard money lenders have more flexibility to evaluate your unique situation when making their decisions. No two borrowers are alike, and they won’t fit into neat boxes like your neighborhood bank can do with mortgage applications. Each new deal, even from a previous borrower, is unique. The lender approaches each loan request with this in mind.
Fewer state and federal laws regulate hard money business lenders which allows for this flexibility. But, because of the Dodd-Frank Act, hard money lenders usually do not provide such loans for primary residences.
Disadvantages of Hard Money Loans
Cost should always be considered when analyzing any loan option. Due to the nature of the businesses that benefit from hard money loans, the opportunities tend to be riskier for the lender than other loan options. Therefore, interest rates on these loans are higher than traditional bank options. The short-term nature of the loans, lower monthly payments, and the ability to access cash quickly should be factored into any decision to accept a hard money loan. In the long run, the expected profit due to the quick access to funding may more than justify the higher interest expense.
The collateral’s value will always be the primary factor in a hard money lending decision. The lender will view the value of the collateral more conservatively than your typical bank. A bank considers your ability to pay and past credit history with any loan application. Therefore, higher collateral values for an applicant with excellent credit history will not increase the bank’s risk.
For a hard money lender, their key to repayment in the event of default is the market value of the collateral. Using a value more favorable to the borrower increases the lender’s risk of covering the outstanding balance in the event of default.
This approach directly relates to the hard money lender’s maximum loan to value ratio. Regular mortgage lenders allow loan-to-value ratios between 80% and 100% or higher. Hard money lenders limit the amount they will allow to between 50% and 70%.
Again, it’s all about the collateral and the lender’s ability to recoup any unpaid balance using the proceeds from the sale of the property. Using lower loan-to-value ratios protects the hard money lenders in a case where the value of the property decreases during the term of the loan.
For the right opportunity, these disadvantages may be less significant than the advantages a hard money loan may offer.
Who Should Take Hard Money Loan?
Since collateral is a primary factor in any hard money loan, it’s a bad choice for for someone with no property. Businesses with real property and high potential to turn a significant profit in a short period may find a hard money loan to be the perfect option.
Property flippers can be an excellent match for a hard money loan. The goal of any flipper is to get into a property, make improvements and sell it for far more than their total investment in a few short months. Low monthly payments work well for a business with regular outlays for labor and materials during the loan term. Ultimately, the proceeds of the property’s sale will satisfy the final balloon payment.
New equipment upgrades or retrofitting an older building with modern features are expensive. Increasing output, taking on a new large client, or expanding into new markets can be a big boost to revenue. A hard money loan may be your answer for needed capital. With real property and increasing revenues, a hard money loan may make it possible to take advantage of a once-in-a-lifetime opportunity.
Hard money lenders may set aside negative marks in your credit history in favor of valuable collateral and your unique situation. A bank or mortgage lender cannot provide the same consideration.
Is speed a factor? Is time of the essence to take advantage of a business opportunity? Would waiting weeks or months for a traditional lender to make a decision and fund a loan cause you to lose out? Consider a hard money loan for these and similar situations.
When the advantages outweigh other factors, it’s time to consider a hard money lender for your needs.
Alternatives to Hard Money Loans
Many small business owners considering hard money are really just looking for a way to raise capital for an upcoming opportunity or project. No matter what your situation is Shield Funding offers a variety of unsecured small business loans that can work as a form of funding and all you need is an existing business with revenues.
A short term business loan can be a great option if you need a bulk amount of money for a short period of time, usually about one year or less. A merchant cash advance can be a great way to secure immediate funding if your existing business processes credit cards. Even if you have poor credit we can help you secure a small business loan with bad credit. All of the business funding options do not require collateral like hard money business loans and the approval process is fast and flexible. Get started today by submitting an application online and begin working with a lender you can trust.