The Ultimate Business Guide To Hard Money Loans

Camino Financial08 Jan 2024
The Ultimate Business Guide To Hard Money Loans
Hard money loans often emerge as a viable solution when unexpected opportunities or challenges arise. These unique financial instruments can provide swift capital, bridging the gap when traditional lending falls short. Join us as we explain these loans, delving into their nature, applications, pros, cons, and alternatives in this comprehensive guide.

What Is A Hard Money Loan?

A hard money loan is a type of short-term financing often used in real estate transactions. Unlike traditional bank loans, these are primarily based on the value of the real-estate collateral rather than the borrower's creditworthiness. Got a property with substantial equity but struggling with a less-than-ideal credit score? A hard money loan could be your ticket to securing the necessary funding.
#DidYouKnow These loans are usually for financing commercial or investment properties.

How Do Hard Money Loans Work?

A hard money loan is usually offered by private lenders (not banks or traditional lenders). The loan terms can vary significantly, often ranging from a few months to a few years.
  1. Loan Amount. Hard money lenders tend to only lend a certain percentage of the property's current loan-to-value (LTV). This percentage can vary, but it's often around 60-70%.
  2. Repayment Term. These loans are usually for short periods, typically 1-3 years.
  3. Interest Rates. Because hard money loans are riskier than traditional loans, interest rates are typically higher than traditional mortgage rates.
  4. Speed. Because the approval depends on the property value rather than a lengthy credit check, the lender can sometimes distribute the funds within days of the loan request.
  5. Payments. These loans usually have interest-only payments, which means that you pay only the interest each month. Because of this, the monthly payments can be quite low, as they do not include any repayment of the principal loan amount. After the interest-only period, the loan becomes due in full. This means that the entire principal amount, along with any remaining interest, must be repaid in one sitting.

Risks Of Hard Money Loans

  1. The Cost. Hard money loans typically have much higher interest rates than traditional lenders. The ballon payment can also be hard to repay.
  2. Loss Of Property. If the borrower fails to repay the loan, the lender has the right to take possession of the property. This could result in a significant loss for the borrower.
  3. Dependence On Property Sale Or Refinance. The typical exit strategies are either selling the property or refinancing with a more traditional lender.
  4. Lending Regulations. Hard money lenders are not subject to the same regulations as traditional banks. This can sometimes lead to predatory lending practices.
If your investment doesn't generate a quick return, you could find yourself in financial problems.

The Pros And Cons Of Hard Money Loans

Pros:
  • Fast Approval. Unlike traditional lenders, who require extensive paperwork and a long approval process, hard money lenders can often approve and fund quickly.
  • Credit Score is Not a Deciding Factor. They can be a good option for individuals or businesses with bad credit, as the approval depends more on the property value than the borrower's credit history.
  • Flexible Terms. As they are typically issued by private investors or companies, they usually offer more flexibility in repayment terms, tailored to the borrower's situation.
Cons:
  • High-Interest Rates. Compared to traditional loans, hard money loans come with higher interest rates, increasing the overall cost of borrowing.
  • Shorter Repayment Periods. These loans generally have a shorter repayment period, which could strain your cash flow if not properly planned.
  • Risk of Losing Property. If you fail to repay the loan, you risk losing the property used as collateral, which can be a substantial loss.
  • Large Down Payment. Hard money lenders usually require a significant down payment, which can be a hurdle for some borrowers.

How Do Businesses Use Hard Money Loans?

Hard money business loans are typically favored by real estate investors, small business owners, and individuals who need immediate financing. These loans can serve numerous purposes, from purchasing real estate properties and funding renovations to meeting urgent business cash needs. Other uses are:

Hard Money Loan Rates

These rates can range widely, typically falling somewhere between 9% and 18% (which is higher than a mortgage, which usually has rates between 4% and 5%). Keep in mind the exact rate you're offered depends on a variety of factors, including your collateral, the loan duration, and your lender's assessment of the risk involved. Interest rates tend to be higher because the risk the lender takes is also higher, which the interest rates reflect.

Is A Hard Money Business Loan Right For You?

A hard money loan can be a good idea if you need quick access to capital, especially for short-term projects, and if you can handle the repayment terms. However, they aren't for everyone. For businesses with bad credit or those seeking swift funding, a hard money loan could be an excellent option. It all depends on your unique circumstances and needs. If your business has a solid credit history, or if you need a longer-term loan, other lending options might be more suitable. People often opt for these products when they need quick financing, particularly for short-term real estate projects, or when they have poor credit that disqualifies them from traditional lenders. They can also be useful for individuals and businesses experiencing cash flow issues. You should consider one of these loans if you're in one of the following situations:
  1. You're in urgent need of cash. One of the key benefits is the speed at which the lender can disburse the funds.
  2. You have a bad credit history. If your business has a poor credit history or is too new to have established credit, then you may have difficulty securing traditional financing.
  3. Your need is more short-term. These loans are usually designed for short-term needs, typically lasting around 12 months to a few years at most.
  4. You have an exit strategy to pay off the loan. This could be selling the property, refinancing to a traditional loan, or another source of cash flow. If there isn't a clear exit strategy, a hard money loan could lead to financial trouble.
  5. You don't mind the higher cost. Remember to calculate the total cost of the loan, including interest payments and any fees or penalties.
  6. You own a valuable asset. Hard money loans are often secured by the value of a property or other high-value assets.
  7. You can tolerate the risk. You need to assess the risk level involved. With a hard money loan, if you default on the loan, you risk losing the property or asset used as collateral.

How To Get A Hard Money Loan

Most Common Requirements

  • Credit Score. You need to have a good credit score to receive approval.
  • Info On Your Finances. This usually comes in the form of bank statements.
  • Property Value and Equity. The value of the property that acts as collateral is paramount. Lenders typically look at the property's after-repair value (ARV) or its current value to determine the loan-to-value (LTV) ratio.
  • Down Payment. Many hard money lenders require a significant down payment to ensure the borrower's commitment.
  • Proof of Funds. This shows that borrowers have the necessary funds to cover down payments, closing costs, and any other associated costs.
  • Exit Strategy. Lenders want clarity on how you plan to repay the loan, such as through property sales, refinancing, or another viable method.
  • Property Type. Whether it's residential, commercial, or another type of property, this can influence a lender's decision.
  • Location. The location of the property, especially if it's in a high-demand area, can play a role in a lender's willingness to provide a loan.
  • Rehab/Repair Budget. If you intend to renovate or repair the property, lenders will typically want a detailed breakdown of costs and plans.
  • Personal Guarantee. Some lenders may require the borrower to offer a personal guarantee, holding them personally liable in the event of a default.
  • Time In Business. If you're applying for a hard money commercial loan, lenders might want you to have been in business for a specific period.

How To Apply

  1. Evaluate Your Situation. First, ensure a hard money loan is the right fit for you. Do the pros outweigh the cons for your specific needs? Can you manage the hard money loan down payment and higher interest rates?
  2. Find A Lender. Look for one that specializes in hard money loans. Don't forget to research the lender's reputation and reviews.
  3. Apply For The Loan. You can begin the application process. This usually involves providing details about your collateral, your financial situation, and your plans for the loan.
  4. Undergo A Property Valuation. The lender will likely require an appraisal of the property you use as collateral to determine its market value.
  5. Review The Terms. If you receive approval, the lender will offer the loan's terms. Review these carefully, and consider seeking legal advice before signing anything.
  6. Close The Deal. If you agree with the terms, you can close the deal and receive the funds. Remember, make sure to plan your repayment strategy from the get-go!

Alternatives To Hard Money Loans

Term Loans

Term loans are a more traditional type of loan where you borrow a certain amount and repay it over a set period. These can be great for businesses who need longer-term funding. They provide a predictable repayment structure and less risk to assets; plus, you can use them for almost any business need. Moreover, they can help build a business's credit history. Apply For A Business Loan!

Equipment Financing

If you need to purchase equipment for your business, equipment financing can be a good option. Instead of using a property as collateral, the equipment you purchase serves as the collateral itself. This is a fantastic option if you need expensive machinery or technology but can't afford to pay upfront.

Invoice Financing

This type of loan allows businesses to borrow against their outstanding invoices. Once your customers pay their invoices, you repay the loan.

Private Loan

Friends and family may be willing to invest in your business, often with better terms than formal lenders. Peer-to-peer platforms are another excellent way to secure funding directly from individual investors.

Home Equity Line Of Credit (HELOC)

If you're a homeowner with a significant amount of equity in your home, a HELOC might be an option. This type of loan allows you to borrow against the equity in your home, providing you with a flexible source of funding.

Commercial Mortgage

If your business is looking to purchase commercial property, traditional mortgages might be the way to go. These are long-term loans that allow businesses to purchase commercial properties and repay the loan over time.

Government-Backed Loan Programs

Small Business Administration (SBA) loans can provide businesses with long-term, low-interest funding. These loans can be a little more difficult to secure, but the favorable terms often make them worth the effort.

FAQs

Can you refinance a hard money loan?

Yes, you can refinance a hard money loan. Refinancing into a long-term loan with lower interest rates can be a smart move once your creditworthiness improves or once the project for which you got the loan becomes profitable.

What are examples of hard money loans?

Examples include bridge loans (for covering short-term liquidity needs), fix-and-flip loans (for buying and renovating a property before resale), land loans, and construction loans (for starting a new project).

Are there unsecured hard money loans?

No, because you secure hard money loans with real estate as collateral.

Do hard money loans require a down payment?

Yes, hard money lenders often require a down payment. The amount can vary, but it's usually based on the Loan-To-Value (LTV) or After-Repair-Value (ARV) ratios of the collateral property.

Who are the best hard money lenders?

The "best" hard money lender can vary depending on your specific needs, location, and type of project. That said, some of the most prominent are:
  • RCN Capital
  • Kiavi
  • Lima One Capital
  • Baselane
  • Visio Lending
Always look for a lender with a solid reputation, transparent terms, and experience in the type of loan you need. Do thorough research and read reviews before making a decision.

What's the difference between traditional business loans and hard money loans?

The difference lies in the flexibility and speed.
  • Traditional loans often require a lengthy approval process and may be more difficult to secure if your credit score isn't in tip-top shape.
  • Conversely, hard money loans can offer quicker approval times and flexible terms, as lenders are mostly concerned with the collateral value.

What's the difference between hard money lenders and conventional mortgage lenders?

Private individuals or small companies are usually the ones that offer hard money loans, which have short terms with high interest rates. The amount depends primarily on the value of the property offered as collateral. Traditional mortgage loans provide long-term financing with lower interest rates based on the borrower's creditworthiness. Their process takes longer and is usually utilized for purchasing a home or long-term real estate investment.

What's the difference between hard money personal loans and hard money business loans?

A hard money personal loan is for personal purposes the borrower's personal assets secure it. On the other hand, a hard money business loan is for business purposes, usually related to real estate, and business assets or real estate secure it.
 
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