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Hard money business loans are loans backed by the business’s commercial real estate. Many startup business owners will turn to hard money loans because they are easier to secure than more traditional kinds of financing. Hard money loans are risky for startup owners because they’re expensive and hard to pay back.
From traditional bank lenders to alternative financing companies, these days, there are many organizations and individuals willing to lend to your business—no matter your qualification.
Now, small business owners with poor credit or little time in business have a few more financing doors open to them. One of those financing options are hard money business loans, meant for business owners who don’t qualify for traditional business loans.
What exactly are hard money business loans—and when should you consider using them?
Here’s what you need to know.
Hard money loans are necessarily specific to small business financing—both consumers and business owners can use them.
A hard money loan in general, then, is an asset-based loan backed by the value of an asset—namely property value.
When it comes to hard money business loans, you’re using your business’s commercial real estate as collateral for the loan.
The property itself is used as protection against the chance that the borrower defaults on the loan.
Which leads us to the next logical question about hard money business loans…. Who qualifies for them?
Hard money business loans are made against the value of a collateralized asset.
This is good news for borrowers who have poor credit scores—hard money business loans are not based on a borrower’s creditworthiness. That’s why these loans are almost always considered last-ditch options when it comes to financing a business. They’re (sometimes) appropriate when you can’t qualify for any other business loans based on your credit score.
The loan you receive is almost totally determined by the collateral you can offer to the hard money lender. But usually, the entire value of the collateral (in most cases, your business’s property) isn’t used. Instead, hard money business loans are calculated using a loan-to-value ratio.
The loan-to-value ratio is a percentage of the property’s value. In the case of hard money business loans, you can expect to have a pretty high loan-to-value ratio—meaning most of the value of the collateral is used to back the hard money loan, and most of the collateral is at risk. Usually, hard money lenders only lend about 70% of the value of the property used as collateral.
Because hard money business loans are a non-traditional way of financing, you can’t always find them at your local bank—or at the most reputable online small business lenders, for that matter.
Generally, hard money loan lenders are private individuals or smaller lending organizations that see value in making such a risky type of deal.
Should you ever use hard money business loans?
Well, as with any type of business loan or financing option, it’s important to weigh the costs and benefits of taking on a loan.
So, here are some advantages and disadvantages that you need to consider before you sign the dotted line on a hard money business loan.
If we’re being realistic, there aren’t many advantages to depending on hard money business loans to grow your company.
But, here are some benefits they have going for them:
The disadvantages of hard money business loans really make this kind of financing a last-resort option for business owners.
Here’s what you need to consider:
If you are a less qualified borrower—and you’ve confirmed that by shopping around for all your business financing options—then a hard money loan could be a viable way to finance any short-term goals you have for your business.
But we can’t reiterate it enough: Make sure that you’ve considered all possible financing options before you choose to go down the hard-money route. Business capital isn’t worth it if it puts your valuable assets at significant risk.
And before you move ahead with a hard money lender, do some due diligence to make sure that they’re a trustworthy and legitimate lender. See if they’re registered with the Better Business Bureau, and try reading reviews from past customers.
That way, you can be confident that you’re working with a lender who will help grow your business—not hurt it!