For entrepreneurs, financing is a crucial aspect of success when launching a business. You must have the proper funding to get your business off the ground. Because there are several types of financing to choose from, you may have a difficult time deciding whether a traditional bank loan or an alternative avenue of funding is best for you. Although they can be more expensive than bank loans, hard money loans are a great financing option for many businesses. Here is everything you need to know to determine if bridge and hard money loans are the right financial solution for your company.
What Are Hard Money Loans?
A hard money loan is a form of financing that is secured by putting an asset up for collateral. These loans are most often used to finance real estate investment, and they are typically secured for short-term financing until the business begins to turn a profit and can fund its own investments. Although hard money loans are sometimes considered a last resort, they often play a crucial role in flipping real estate properties.
What Are the Terms for Hard Money Loans?
While the interest rates for hard money loans are often high, there is usually plenty of room to turn a healthy profit because this type of financing is short-term. The terms for a hard money loan vary among lenders, but you can expect similar terms to the ones listed below.
- Low interest rates
- Documentation, appraisal, application, inspection and document processing fees.
- High LTV rates depending on the project
- Generous terms
How Is Hard Money Different From Private Money?
Hard money and private loans are similar because they both provide financing by individual lenders rather than a bank, but they have several distinct differences. Private loans may be given for either short or long-term durations, but they are typically extended by people you have a personal relationship with such as friends or family members. This means the money can be used for any reason, but it is often difficult to build enough trust with someone for them to agree to loan you a substantial amount of money.
In contrast, hard money loans are extended by financial companies or individual investors who secure hard assets as collateral. The loans are primarily short-term and rarely last beyond eight years, so if you are searching for long-term financing, you will need to transition to a different type of loan as you near the completion of your hard money loan. This type of financing is most beneficial for helping fix or flip real estate properties.
How Do Hard Money Loans Differ From Traditional Financing Options?
Traditional lenders focus heavily on the borrower, while hard money lenders are typically more concerned with the assets. To receive a hard money loan, you will need to put up collateral, which is why this form of financing is so popular for real estate transactions. The piece of property in question serves as the collateral while you are free to use the money you receive to fix and flip the property before reselling for a profit.
This means that hard money loans are easier to qualify for because you simply need something valuable to use as collateral rather than perfect credit. Banks often limit the amount of financing they will extend to borrowers with multiple properties, while hard money loans have no restrictions. They are most often used for real estate purchases but they can be secured for other purposes such as equipment financing.
Can Hard Money Finance Real Estate?
Hard money loans don’t require a perfect credit history or a W-2 income, which is why they are popular for real estate investors. However, they are not designed for long-term financing. If you are ready to invest in a rental property that does not need any remodels or renovations and you qualify for a bank loan, you are probably better off securing a lot with lower interest fees from a traditional lender. If you are trying to improve your credit score and do not qualify for a traditional loan yet, you may want to apply for a hard money loan with the intention of securing traditional financing once the loan period is over.
If you’re business works by purchasing and flipping unconventional properties and selling them for a profit, hard money loans are an ideal source of financing. These properties are not intended to stay in your possession for long and are usually sold before the loan period runs out. To ensure you can turn a decent profit, it is best to secure hard money loans that use the 70 percent rule.
What Is the Approval Process for Hard Money Loans?
Your chances of securing a hard money loan are higher if you start building relationships with lenders before you need the money. While these lenders do take credit score into consideration to determine approval, they do not base their entire decision on this one aspect. They are more concerned with seeing if you are trying to resolve any credit issues, which is why developing a working relationship with the lender prior to applying for a hard money loan is a good idea.
Hard money loans require less documentation than other types of financing. You will still be required to show your tax return information for the past two years and your credit score, but because so little paperwork is required, you can expect to close on a hard money loan within two weeks of being approved.
How Do Hard Money Lenders Determine Eligibility
Hard money loans are easier to qualify for than other types of financing, but they still have strict requirements to determine eligibility. Along with analyzing your credit score to determine if you are trying to resolve any issues, lenders also look at your budget and the scope of your project. If you are using the loan to flip a real estate property, the lender will consider the type of property you are working with, because certain properties move quickly and provide them with a better return on their investments.
After analyzing all of these elements, a hard money loan will determine whether or not you are approved for a loan. It is important to remember that you do not need a great credit score to qualify, but you do need to prove that you are managing any issues responsibly.
What Is the Exit Process for Hard Money Loans?
Hard money loans are processed similarly to other types of financing. Once the loan is approved and the contracts are signed, the lender will disperse the money in increments over the loan period. The borrower may be required to produce invoices and pictures of the project to prove that it is staying on budget. The borrower may request a disbursement as the project nears completion. If you think that there is any chance you may want to hold on to a property for longer than the term of a standard hard money loan, you are better off applying for a traditional bank loan because hard money lenders often will not extend the loan beyond eight years.
What Are the Advantages of Hard Money Loans?
The primary disadvantage of hard money loans is that they cost more than other types of financing. Although you may end up spending a lot on interest rates, hard money loans are advantageous for the following reasons.
- They can take over when traditional types of financing fall through when a property is under contract.
- They are quick and can often be closed within 10 business days.
- You can often qualify for a hard money loan even if you are not eligible for other types of financing.
- The approval process is less stringent than with traditional bank loans.
- They work with properties that many banks are not willing to finance.
What Should You Look for in a Hard Money Lender?
As in every industry, there are a few hard money lenders that want to see you fail so they can make more money on your loan. However, these lenders are by far in the minority. You can make sure you don’t end up working for one of the unscrupulous lenders by vetting them just as you would anyone else you choose to work with.
Striking up a professional working relationship with potential lenders will help you gauge their intentions. You can find candidates through the Real Estate Investor’s Association, and you can ask for referrals from your colleagues. The best way to determine if a hard money lender is reputable, however, is to look at past investments. Lenders with good track records on investments should be safe to work with.
A hard money loan is a great financial option for many businesses. While it may be structured differently than traditional bank loans, a hard money loan is often easier to qualify for. If you think this avenue of financing is right for your business, HML Solutions is happy to extend a hard money loan to help your company thrive in the competitive marketplace. Contact us today to apply.