If you're aiming to secure a lump sum of money, you're likely exploring all of your options -- including hard money loans. When managed correctly, this type of financial support can help your business excel, but if ineffectively executed, a hard money loan could destroy your business.
Understanding your options is the first step towards long-term success. Could a hard money loan take your business to the next level?
What Is a Hard Money Loan?
When you apply for a loan, typically, the first thing that a borrower will look at is your credit. In some cases, however, this isn't the best option for a small business owner. If you cannot obtain a traditional loan from either a credit union or a bank, private lenders may offer you capital.
The term "hard money" comes from the fact that a loan will be secured by a real, tangible asset. More often than not, this asset will be in the form of real estate. In that sense, a hard money loan is generally a short-term, high-interest funding opportunity that needs to be effectively handled and managed.
Essentially, a hard money lender is any company or person that has extra money to lend. Although there are many unique circumstances regarding the terms and conditions of a hard money loan, put simply, hard money lenders will not offer a large cash amount without the borrower having specific assets, such as a home or property they can use as collateral.
After you approach a hard money lender, they will then calculate the loan-to-value ratio. The higher this ratio, the more difficult it can be to obtain a loan. For example, say you require $50,000 in order to make a $90,000 investment. Your ratio will be $50,000/$90,000 x 100, which equals 55.6 percent. To the lender, this means that they will need to lend you 55.6 percent of the total cost.
How Can Hard Money Lenders Assist Small Business Owners?
As a small business owner, you likely do not have the income or collateral to take your business objectives to the next level, and you may also have less-than-great credit. In that sense, a hard money loan can be a major advantage.
For starters, these loans are often given out very quickly -- typically within five to 10 days. When compared to an average of 30 to over 45 days when borrowing from a bank, this turnover time is very attractive. If you need cash fast, this approach can be an optimal choice, especially in terms of investment opportunities.
Also, if you're a startup, you may not have the sales history required to receive a lump sum of money -- which is something that commercial hard money lenders do not often require. The same is true regarding your tax returns, which is something that a bank will likely review in great detail.
Unlike when you borrow from traditional lenders, you can also use your loan without as many regulations and limitations. With that being said, hard money loans are not typically the best idea in relation to long-term investments. If you need to make an initial purchase or would like to make a fast investment, then this is when you should consider a hard money loan.
As long as you use a hard money loan properly, in addition to ensuring due diligence throughout the lending process, this option can provide you with a great business opportunity. Don't be shy to ask questions and really get involved, understanding the full conditions of your agreement.
Despite the relatively high risk, hard money loans can be highly beneficial across various situations. While these loans are not ideal for every business, when used properly, they can help you make excellent returns on your small business ventures and investments.