Are Hard Money
A Better Choice For You?
Hard money business loans can be a viable solution to a need for quick, short term financing.
But a business loan doctor may or may not recommend it.
Make sure you’re educated BEFORE making your decision. Let’s review the real answers to…
- What are hard money business loans?
- How do lenders benefit from taking on this added risk?
- Will a Hard money loan be a good choice for me?
What are Hard Money Business Loans?
Well, let's start with defining hard money. Hard money refers to high risk short term loans based on equity in a property.
They’re especially useful for persons who
- Have poor credit
- Have unstable income
- Need money very fast
- Choose for any reason not to deal with banks
- Are self-employed
Notice again, that they are secured by equity. That is, equity from real property either residential or commercial.
They must be secured by real estate because
- The lenders are taking on a very high risk.
- They're lending to persons who otherwise could not get a loan even with high amounts of equity in their property.
- The only real recourse these lenders have is the property the loan is secured by.
What benefits do lenders get for taking on this added risk?
- 1.) They get a higher yield on their investment when the loan is paid back.
- 2.) They get a higher yield on their investment should the loan default.
- 3.) They get their money back much faster.
How did they manage all that?
- A.) First they charge you higher interest rates.
- B.) Then they provide low LTV's from 40% to 75%.
- LTV means loan-to-value. It’s a percentage that describes how much they will lend in comparison to what the property is worth.
- For example 60% LTV on a property worth $100,000 would be $60,000.
- C.) Finally they make you pay the money back in a shorter period of time.
- Hard money business loans are mortgages structured with interest only payments and a final balloon payment due within 6 months to 3 years.
Will a hard money business loan be a good choice for me?
Can you start to see how, depending on the circumstance, hard money loans can be a blessing or curse?
Imagine you have a property that's cash flowing in the negative. Month after month the property is costing you money mainly because you can’t rent out multiple units that require repairs.
Desperate to prevent the property from going into foreclosure you seek the assistance of a hard money lender.
For illustration purposes, let's say the property is worth $1,000,000. They will lend you 60% LTV at an interest rate of 14% over 24 months.
You still owe $300,000 to the bank, so the 60% LTV will leave you with a cool hard $300,000 cash!
Does it sound like a good deal for you? Yes? Maybe?
Let’s talk about the potential downside first.
What if something goes wrong? What if the repairs take longer than you anticipated? What if it takes longer than you expected to get new tenants in the property?
Even if all does go well, exactly how do you plan to pay back a lump sum of $600,000 within 24 months?
Most likely you’ll have to sell the property off or be in a position to refinance within that short window time.
If you don't have a back-up plan for everything potentially going wrong, a hard money business loan can definitely become a terrible mistake!
What’s the potential upside?
The $300,000 might be more than enough for all repairs. Likely, you could have the units repaired and rented out within 12 months.
Leaving you with 12 months of “play” time. Not to mention some extra cash on hand!
Meanwhile, if your credit is poor, 24 months is more than enough time to benefit from a credit restoration program.
That will ensure you’ll be in a position to refinance into a long term permanent commercial loan within the 24 month time frame.
Done right, a hard money loan can be a beacon of light in a storm. A blessing indeed!
Before you make your decision be sure to talk to a business loan broker / doctor.
A good broker won't let you walk blindly into a hard money loan. They will assess your financial picture and determine if it makes good sense for you.
Sadly, some will encourage you to take hard money loan, although it's a bad choice, just because they want to make a commission.
A borrower that’s emotionally attached to a property and a greedy broker is a recipe for disaster! Don't fall into this trap.
Have your broker review with you in detail whether or not hard money business loans make sense for you.
There a plenty of other questions out there about hard money loans.
Here are more of your questions that we answer right here at Guide-to-Business-Loans.com
Can I get hard money commercial loans with bad credit?
- Can I get a hard money business loan secured by inventory or equipment?
Can I get hard money loans without personal guarantees?
Can I get commercial hard money loans without all the supporting documentation requests (aka red tape)?
How can I tell if a direct hard money lender is a scammer?
Do you have more questions that aren’t answered here?
Please send in a
request for your questions to be answered at the Business Loan Express Contact Us page.
We look forward to hearing from you.
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