What Is A Hard Money Loan, and When Would I Use It?
A hard money loan is a loan type that is secured using real property as collateral. Many small business owners rely on this type of loan as a short-term “bridge” type of loan instead of having to try getting a traditional loan from a bank.
Unlike traditional loans, a hard money loan uses property as collateral and is not heavily influenced by the borrower’s credit report or credit score.
Additionally, a hard money loan comes from individual lenders, not banks or other financial institutions.
A small business owner usually takes out a hard money loan to finance the purchase of equipment or repairs and renovations of business property.
These loans are often more flexible in terms of the sum borrowed than traditional loans, as banks usually work with large sums of money when it comes to lending.
Pros and Cons of Hard Money Loans
There are several factors that make hard money loans desirable when compared to traditional lending.
- Faster approval
- Not dependent on creditworthiness
- Flexible lending sums
- Relatively simple process (not nearly as much paperwork)
However, there are a few setbacks to think about when determining whether hard money lending is right for you.
- High-interest rates
- Lower than traditional LTV ratios
Appropriate Situations for Hard Money Loans
In many small business endeavors, a hard money loan would be a better option than applying for a traditional loan from a bank.
A hard money loan may be beneficial for the following situations:
- You need fast money but you already have a finance-heavy portfolio.
If you’re already financing several properties, traditional banks may be hesitant to offer you another loan.
- You need a short-term bridge loan to bide your time on an unstable property.
Hard money loans can give you time to improve a property’s performance so that you can refinance for better rates.
- You need to purchase a piece of property and time is a factor.
If you don’t have time to wait for traditional mortgage timelines, a hard money loan can provide you with the fast money you need.
- You need to renovate or repair your business property.
If your property is less than “market-ready,” banks may not want to lend to you, which makes hard money loans worth considering.