What are Hard Money Business Loans?
A hard money business loan is secured using real property as collateral. It differs from traditional business loans in that the collateral is the main determining factor for approval, as opposed to conventional requirements like a personal credit score, time in business, and annual revenue. These loans are more common in this real estate investment sector, but can be used for business financing.
Another significant difference between hard money loans and traditional business loans is the lender that supplies the funds. Hard money loans are funded by private lenders, investors, or companies, as opposed to traditional financial institutions like banks and credit unions. Hard money loans generally have higher interest rates and shorter repayment terms compared to traditional loans, but they offer quick access to cash. Terms can last from several months to a few years.
These short-term loans largely came from the world of real estate, where investors would take out a loan to finance renovating a property to flip it. Property investors use these loans when they don’t have the cash reserves to flip a property on their own. In theory, a real estate investor would acquire a property with a hard money loan, use the property as collateral, renovate it, and then sell it for profit and pay off the loan. Hard money loans are also called bridge loans in this context.
Hard money loans in business operate in a similar way, where any commercial or private property the company owns acts as collateral. The business then repays the loan with future profits. In most cases, you’ll work with a direct lender for hard money business loan programs.
Hard Money Loans for Business Acquisition
Hard money loans offer a rapid and flexible financing option for acquiring businesses, particularly when traditional lenders impose lengthy approval processes. Hard money loans don’t require good credit, so many small business owners with poor credit turn to these financing options.
These loans are secured by tangible assets, such as real estate, equipment, or inventory, rather than relying heavily on the borrower’s creditworthiness. This asset-based approach enables quick funding, often within a few days, making it ideal for time-sensitive acquisitions.
While hard money loans provide swift capital, they come with higher interest rates compared to conventional financing options. The typical loan term ranges from one to five years, emphasizing short-term repayment. Borrowers should be prepared for these higher costs and ensure that the acquired business can generate sufficient cash flow to meet repayment obligations.
To secure a hard money loan for business acquisition, it’s crucial to identify assets that meet the lender’s criteria and prepare a solid business plan to demonstrate the acquisition’s viability. Engaging in thorough due diligence and negotiating favorable terms can help mitigate risks associated with higher costs and short repayment periods.
How do Hard Money Loans work?
Getting a hard money loan requires working with a private lender or company. The amount you receive is based on the value of your collateral.
Collateral Property Loan-to-Value (LTV)
Hard money loans require using real property as collateral. For hard money business loans, that means using commercial real estate. Types of commercial real estate that you can use as hard money collateral property include office buildings, storefronts, warehouses, factories, and other similar properties.
To assess risk, lenders use the loan-to-value ratio (LTV) of the collateral asset. A loan-to-value ratio is the percentage of the collateral’s value that you receive as the loan amount. Hard money loans tend to have a lower LTV than traditional loans.
Traditional lenders may allow loan-to-value ratios as high as 90%. Hard money lenders typically offer loan amounts with LTVs that range from 50% to 75%. Lower loan-to-value ratios protect hard money lenders from losses if property values decrease during the loan term.
For example, suppose you are taking out a hard money business loan against real property appraised at $150,000. The hard money lender would then issue you a loan for 65% of that value, or $97,500.
Approval & Funding Speed
Hard money lenders often allow for streamlined, online applications with minimal documentation, expediting the funding process. Traditional bank loans can take several weeks or even months to qualify for, in contrast to hard money loans.
A hard money business loan is often easier for borrowers with bad credit to obtain compared to traditional business loans. Hard money lenders generally require fewer financial disclosures compared to conventional lenders.
Some hard money lenders may be able to approve your application within 24 hours and provide funding in one to two business days. Hard money lenders can approve loans quickly due to fewer regulations than traditional lenders.
Down Payment
Most hard money lenders require a down payment of anywhere from 15%-30%. If you have an established relationship with the lender and have successfully repaid hard money loans, they may waive the down payment. A larger down payment can help secure better loan terms from hard money lenders.
Interest Rates & Other Costs
Hard money business loans usually carry higher interest rates than conventional loans to offset the lender’s risk. The loans are riskier for the lenders, and they charge more to help mitigate that risk.
Lenders charge interest rates of anywhere from 7%-20%, with fees that total anywhere from 1%-10% of the loan amount. Origination fees vary between lenders.
Loan Proceed Disbursement
Most hard money loans are disbursed as a single lump sum. However, some lenders may structure the loan as a line of credit.
Repayment
Hard money loans have short repayment terms, usually ranging from a few months to a couple of years. The short repayment period means you’ll have a larger payment due. Repayment schedules can be monthly, weekly, or daily.
If you default on a hard money loan, the lender can seize the collateral used to secure the loan.
Where can I get a Hard Money Loan?
It’s mostly private companies or investors that offer hard money loans. They’re typically flexible and can move quickly on loan decisions and invest in your business opportunities. Many hard money lenders are local companies or investors, but some operate nationally.
You can find hard money lenders with a quick internet search. You can also contact business owners to find other hard money lenders. However, it would be best if you were careful when selecting a private lender.
The best practice would be to contact several private lenders to compare hard money lending options. If possible, look for other business owners or property investors who worked with that lender. The best hard money lenders will be upfront about their costs.
What are the advantages of Hard Money Loans?
In general, hard money loans carry easy applications with minimal documentation requirements. Since the value of the property used as collateral is the primary factor for approval, you don’t have to supply as many documents for income verification.
These loans don’t require high credit scores, a long time in business, or high annual revenue. Many hard money lenders accept borrowers with bad or fair credit. Again, the value of your collateral is the most crucial factor hard money lenders consider when approving loan requests.
It’s also possible to get funds faster than with conventional loans. You could potentially get your money in just a few days. This is especially true when using a hard money loan to purchase a property. Hard money lenders don’t have the same waiting periods that a mortgage lender must follow.
What are the disadvantages of Hard Money Loans?
These loans typically carry higher interest rates and fees than traditional business loans or commercial mortgages. The loans are considered riskier, and you usually get a higher interest rate. In addition, hard money lenders are not subject to the same regulatory standards as traditional lenders.
The risk also applies to the borrower. The property they use as collateral is at risk because the lender will claim the collateral if the borrower defaults.
Hard money business loans also tend to have a lower LTV than other forms of traditional financing. The lower LTV means you’ll get a loan amount significantly lower than the value of the asset you’re putting at risk.
Most hard money loans also require a significant down payment and closing costs. It can be challenging to assemble that kind of cash up front.
The increased cost and short repayment terms combine for larger monthly payments that can strain your cash flow. Some lenders may help you reduce your monthly payment by making interest-only payments or interest plus a small percentage of the principal. However, you would then have a large balloon payment due at the end of the loan term.
Hard Money Loan Pros & Cons
Here’s a quick summary of the benefits and drawbacks of hard money business loans.
Pros:
- Simple applications with minimal documentation.
- Can get approved with a low credit score.
- Quick turnaround times on approval and receiving loan funds.
Cons:
- High interest rates and fees compared to conventional loans.
- Risky way to borrow money.
- Lower LTV than other forms of asset-based financing.
- Might require a sizeable down payment.
- Short-term financing with either high monthly payments or a balloon payment.
Frequently Asked Questions
Here are the most common questions about hard money business loans.
Are Hard Money Loans safe?
All loans carry some risk, and hard money loans are sometimes considered high-risk due to the interest rates and short repayment terms. However, hard money loans can be safe if done the right way.
Hard money lenders differ from traditional mortgage lenders and are not subject to the same regulatory oversight. It’s crucial to work with reputable hard money lenders to protect your business and assets.
Always compare interest rates and upfront fees when shopping for small business loans. While hard money business loans are easier to obtain than bank approvals, you must ensure the extra cost is worth it.
Can I get a Hard Money Business Loan with bad credit?
Yes, one of the primary reasons small business owners turn to hard money loans is that they lack the credit score to qualify for a conventional loan. Like most bad credit business loans, hard money loans are used as bridge financing.
Hard money loans can be obtained with a minimum credit score of 500 by some lenders. You can get short-term funding to support your business or fund a real estate acquisition while improving your credit to qualify for more advantageous loans.
Do Hard Money Loans require a down payment?
In most cases, hard money loans will require a down payment of up to 30%, which tends to be higher than traditional loan options. However, a larger down payment improves lender confidence. Private investors are more likely to lend money to business owners who have invested their own equity.
What are my alternatives to Hard Money Loans?
Real estate investors primarily use hard money loans to fund flipping houses, but small businesses can also use them. However, a hard money loan is not right for every business or situation. Alternative small business lending options include grants, special credit programs, microloans, and peer-to-peer lending.
There are many alternative business loans to consider over a hard money loan. Here are some other business loans to consider:
Business Term Loans
- Loan amounts: $5k-$10 million
- Factor rates: Starting at 1-4% p/mo
- Terms: 3 months – 10 years
- Speed: 1-3 business days
Term loans are the most common and conventional form of business financing. Most people think of term loans when they hear the phrase business loan. Short-term loans offer fast capital that can be used for a variety of purposes and typically have terms of up to 18 months.
With a term loan, you receive a considerable cash sum upfront, which you repay plus interest in fixed monthly payments. Business loan approval is based on traditional factors like your credit score, time in business, and annual revenue.
However, you can get a business term loan through an alternative business financing facilitator (like United Capital Source) for much lower qualifications than you would need at a bank. Approved business owners we work with here at UCS typically have a minimum personal credit score of 550 with at least one year in business and $75k+ in annual revenue.
Equipment Financing
- Funding Amount: Up to $10 million per piece of equipment
- Rates: Starting at 6.5%
- Terms: 1-10 years
- Speed: 1-2 business days
Equipment financing allows you to acquire expensive business equipment and machinery you couldn’t afford to purchase out of pocket. It’s sometimes possible to finance 100% of the cost.
There is a wide range of business equipment, and nearly every industry uses some form of equipment. Some examples include computers, office furniture, restaurant equipment, construction and manufacturing machinery, fleet vehicles, gas station equipment, and much more.
The equipment you’re financing acts as the collateral, which is known as a self-collateralized loan. You might be familiar with other self-collateralized loans, such as car loans or mortgages.
Approved business owners typically have a credit score of 475+ with at least six months in business and $250k+ in annual revenue.
Business Lines of Credit
- Funding Amount: $1k-$1 million
- Rates: Starting at 1% p/mo
- Terms: Up to 36 months
- Speed: 1-3 business days
Business lines of credit are flexible financing structures that let you access funds only when needed. It operates like a credit card, providing a set credit limit for drawing funds. You only pay interest on the money you draw, so you could save money if you don’t use all the funds.
Business lines of credit through UCS are revolving, which means your credit limit replenishes as you pay off what you draw. For example, if you drew $20,000 against a $150,000 limit and then repaid $10,000, your new credit limit would be $140,000.
A line of credit is an excellent option for ongoing projects, seasonal businesses, and covering unexpected costs. Approved business owners typically have a minimum credit score of 575+, at least one year in business, and $75k+ in annual revenue.
SBA Loans
- Funding Amount: $50k-$10 million
- Rates: Starting at Prime + 2.75%
- Terms: 10 – 25 years
- Speed: 4 – 12 weeks
SBA loans are government-backed financing options designed to help small businesses access capital with favorable terms. These loans are best suited for established businesses seeking long-term funding for expansion, equipment purchases, working capital, or real estate.
SBA loan approval is based on standard factors such as credit score, business history, and annual revenue. Still, the SBA guarantee reduces risk for lenders, often resulting in lower interest rates and longer repayment periods. The application process can be more involved than other alternative financing options, but the cost and repayment flexibility make SBA loans an attractive choice for businesses that qualify.
Merchant Cash Advances
- Funding Amount: $5k-$5 million
- Rates: Starting at 1%-6% p/mo
- Terms: 3-24 months
- Speed: 1-2 business days
Merchant cash advances (MCAs) provide businesses with a lump sum of capital in exchange for a portion of future sales, usually credit card transactions. MCAs are ideal for businesses with strong daily sales that need quick funding for short-term expenses, inventory, or emergency cash flow.
Repayment is automatic and fluctuates with revenue, giving businesses flexibility during slower periods. While MCAs offer rapid access to capital, they can be costly, and repayment rates are often high compared with other loan types.
Accounts Receivable Factoring
- Funding Amount: $10k-$25 million
- Rates: Starting at 1% p/mo
- Terms: Up to 24 months
- Speed: 1-2 weeks
Accounts receivable factoring, also called invoice factoring, allows businesses to convert unpaid invoices into immediate cash by selling them to a factoring company at a discount. This financing method is ideal for businesses that need quick access to working capital but have outstanding invoices that may take weeks or months to collect.
Factoring companies handle collections directly, which can save time, but fees and discount rates can add up. This solution is ideal for businesses seeking to maintain operations without waiting for invoice payments, thereby avoiding traditional debt.
Hard Money Business Loans – Final Thoughts
Business owners seeking quick funding for a short-term project or goal may consider hard money loans if other options are unavailable. However, it’s essential to understand the risks involved and thoroughly vet the hard money lender before agreeing to the loan terms.
The combination of increased interest rates, using the property as collateral, and looser regulations for hard money lenders all contribute to a higher risk. However, if you can pay the loan off in time and use the funds to support or grow your business, then it is undoubtedly a viable option.
Contact us if you have more questions or want to apply for a small business loan. Our loan executives can answer your questions and help you find the best small business financing product to support your business goals.
