Hard Money Loans

Hard money loans are one of the quickest ways to get financing for a range of business needs. They’re typically short-term loans, meant to cover expenses until long-term financing comes through. Hard money loans can cover real estate, equipment, inventory, and construction costs.

Overview

Securing a loan through a traditional bank can be a long process. Banks must operate under strict regulations and have to look closely at a borrower’s history and reputation. Hard money lenders, on the other hand, can approve loans quickly based on existing assets and ability to pay. Because most hard money loans are secured on collateral, the borrower’s credit history isn’t as high a priority as with long-term financing. While hard money lenders do still have to operate within regulations, they are not as strict as banking rules.

CRE Acquisition

For many real commercial real estate businesses, buying a newer, larger or more centrally located property can be a challenge while making payments on an existing property loan. Real estate bridge financing is a form of hard money loan that allows a building owner to access a new property quickly while they await permanent financing or while their existing property is on the market.

Fix and Flip Investors

One great example of funds for fast action in hot markets is a “fix & flip” real estate hard money loan. Real estate investors who specialize in renovating homes for resale tend to choose hard money loans because they allow the investor to strike on hot deals before their competition. They use the hard money loan to fund the purchase and renovation of the property and then use proceeds from the sale of that property to pay off the loan.

Equipment Hard Money Funding

Equipment is another expensive component of operating a business. Most businesses use equipment of some sort, whether it’s heavy machinery or high-tech software. It’s not always easy to commit funds to equipment upfront. A hard money loan enables the purchase of expensive equipment without the huge upfront cost. Hard money loans must be paid off with a final balloon payment, so businesses must have a strategy to refinance or pay off the full cost of equipment at the end of the loan term.

Inventory and Open-to-Buy Funds

Many business owners are surprised to discover that inventory can be financed with a hard money loan. A sudden influx in demand can leave a business with orders to fill, but not enough upfront cash to bring in products to fill them. A hard money loan can be used to pay for new inventory. Once those orders have been filled, the revenue can be used to pay off the loan.

Loan Highlights

  • Hard money loans are designed to have short terms, from months to a few years. 
  • Hard money loans are easier to get but come with higher interest rates than bank loans. 
  • Most hard money loans are secured with collateral. 
  • Loans can be used to finance real estate, construction, equipment, and inventory. 

Benefits

  • Loans can be approved quickly. 
  • Most lenders operate locally and understand your market. 
  • Borrowers aren’t locked into long-term payment obligations. 
  • Poor credit isn’t a problem. 

Challenges

  • Collateral may be taken by the lender if the loan isn’t paid. 
  • Hard money loans must still be repaid, even if long-term financing fails to come through. 
  • These loans often carry high interest rates. 
  • Default on the loan will negatively affect credit records.