Hard Money Business Loans
So you need capital, cannot qualify at a bank, and think a hard money business loan is right for you and your business venture. Do you know everything you should about a hard money loan? Are hard money loans safe? Are there differences between traditional hard money loans and alternative hard money business loans?
Before completing an application, every borrower should educate themselves. 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 or a different loan fits best for your situation.
How Do You Qualify For A Hard Money Business Loan?
If you’re wondering “can I get a hard money loan with bad credit?” The answer is yes! Below are the approval requirements for business funding with our most basic program, which only requires a minimum credit score of 500, and is a great alternative because you do not have to risk collateral.
Shield Funding helps borrowers with existing businesses secure private business loans for any type of venture, even if they do not have collateral for traditional hard money loans or they have bad credit. We also have great options for borrowers with good credit. Our application process is fast and secure and approved borrowers are eligible to receive funding in as fast as the same day. 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 traditional hard money loan is that it is secured by collateral. This differentiates hard money loans from other business loans, although they both help a borrower receive funding. As long as you own or are buying real property, you can probably qualify for a hard money loan. Property usually consists of a commercial or residential building or land.
If you want to know if hard money loans are non-recourse, the collateral does give the lender recourse. What happens if you default on a hard money loan? They will seize the collateral.
Who regulates hard money lenders?
Regulators such as the Federal Reserve, the Office of the Comptroller of the Currency, and others regulate banks and traditional mortgage lenders. When they lend, they must comply with red tape and federal regulations.
Unregulated private lenders and individuals provide funding for hard money loans. Hard money loans also have shorter terms than other traditional property loan options—usually only a couple months to a few years. Even though they do not have compliance regulations like banks, you are still signing a contract with legal ramifications.
Due to higher risk, the interest rates are higher than a traditional mortgage or some small business loans. What interest rate do private lenders charge? It ranges from 12% to 45% or more, depending on your risk profile and other factors.
How Does a Hard Money Loan Work?
Hard money loans are often called 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 more effort into evaluating the value of the property, since this value will be the basis for the loan amount.
Do hard money loans require a down payment? Sometimes. If you are new to flipping, or have little experience, they might require money down. If you have successfully worked with the lender before, they might not.
Hard money loans charge lower monthly payments than other types, 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. Are hard money loans worth it? Under the right circumstances – absolutely.
Fast funding can be the difference in the success or failure of an opportunity. 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 time.
Do hard money lenders check credit? Yes, but they focus on collateral above all else. They do not evaluate 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 real property secures the loan, 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. They may ask for proof of funds available to make payments until the flipped property has sold.
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 with a mortgage application at your neighborhood bank. Each new deal is unique, even if the lender worked with the borrower before. The lender approaches each loan request with this in mind.
Fewer state and federal laws regulate hard money lenders, which allows for this flexibility. But, because of the Dodd-Frank Act, hard money lenders usually do not lend for the purchase of a primary residence.
Disadvantages of Hard Money Loans
When analyzing any loan option, consider its costs. 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.
Because 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, lower collateral values and a larger loan for an applicant with excellent credit history will not increase the bank’s risk.
What happens if you default on a hard money loan? The lender’s key to repayment in this case is the market value of the collateral. Using a higher value and requiring a lower down payment from 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%. If you have ever seen an ad that made you wonder – what is a 70 hard money loan? – it is a hard money loan product with a 70% LTV ratio.
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. The money you put down to secure the deal protects them from a loss of value.
For the right opportunity, these disadvantages may be less significant than the advantages a hard money loan offers.
Who Should Take Out a Hard Money Loan?
Collateral is a primary factor in any hard money loan, so it is a poor choice of lending product 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 flipper with regular outlays for labor and materials during the loan’s term. Ultimately, the proceeds of the property’s sale will satisfy the final balloon payment.
How can I get a hard money loan for a flip? Past success in flipping, the property you plan on flipping, and the amount you can put down will help you secure financing. If you are brand new to flipping, you will likely have to make a larger down 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, but often requires capital outlays before they produce revenue. A hard money loan may be your answer for needed capital.
With real property as collateral, 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.
A Great Alternative: Hard Money Business Loans
Many small business owners looking at hard money are really just looking for a way to raise capital for an upcoming opportunity or project. A hard money business lender can be a perfect fit. 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 you do not have to pledge and risk your collateral. All you need to qualify is an existing business with revenues.
A short term business loan can be a great option if you need a lump sum of money for about one year or less. If your business processes credit cards, a merchant cash advance can be an even easier way to secure immediate short term funding. Even if you have poor credit we can help you secure a small business loan with bad credit.
All of our funding options do not require collateral like traditional hard money loans and the approval process is fast and flexible. Get started today by submitting an application online and begin working with a hard money lender you can trust.