From big bank lenders to alternative financing companies, these days there are many organizations and individuals willing to lend to your business—no matter your qualifications.
Now more than ever, 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 is hard money business loans, a solution meant for business owners who don’t qualify for traditional business loans.
But, what are hard money loans and how do you know if you should use them for your business?
This guide is here to help you answer those questions.
We’ll explain how hard money loans work, who can qualify for this financing, and what type of lenders offer these loans. Plus, we’ll break down the pros and cons of hard money business loans, as well as discuss top alternatives—so you have everything you need to decide if this financing is right for you.
In essence, hard money business loans are loans backed by your business’s commercial real estate, which can include property and land. As a loan that heavily relies on collateral, hard money loans are designed to accommodate business owners who can’t qualify for other types of small business financing.
Generally, startup business owners or business owners with bad credit will turn to hard money loans because they’re easier to secure. This being said, however, hard money business loans are particularly risky for these types of business owners because they’re expensive, and therefore, very difficult to pay back.
First, it’s important to note that although hard money business loans refer to those that are accessed by business owners, this type of loan is not necessarily specific to businesses—consumers can also access hard money loans.
This being said, business owners can find hard money loans from a variety of sources, including alternative lenders, private individuals, and private funding groups. Compared to a traditional business loan, hard money loans are entirely asset-based—meaning backed by the value of an asset, namely your business’s property or land.
In other words, hard money loans are a type of secured business loan where you use commercial real estate as collateral for the loan. As you may already know then, the real estate you use as collateral serves as a security measure for your lender—if you default on the loan, the lender will be able to claim your property to make up for lost funds.
Overall, because these loans are so dependent on collateral and attract less-qualified borrowers, they’re considered much riskier than other loans. Therefore, hard money business loans will have higher interest rates than other financing products and will often require fast repayment—once again, making them difficult to pay back.
As strictly asset-based loans, hard money business loans are not based on a borrower’s creditworthiness. Instead, your ability to qualify for this loan is based entirely on the collateral you can offer to your hard money lender.
This being said, typically the entire value of the collateral isn’t used to determine your qualifications. Instead, a loan-to-value ratio is calculated for your hard money business loan.
The loan-to-value ratio is a percentage of the property’s value that’s used to determine how risky it is for a lender to issue you a loan. Generally, the higher the ratio, the more risk for the hard money lender, and therefore, the more difficult it is for you to get a loan. However, because a hard money business loan is reliant on a significant amount of collateral, you’ll expect to have higher loan-to-value ratios with these financial products.
As an example, if you’re offering up collateral that’s worth $100,000, a lender won’t want to issue a $100,000 loan. Instead, they may offer you $70,000. In this case, your loan-to-value ratio is $70,000 to $100,000, or 7/10, which is 70%. Usually, hard money lenders only lend at this rate—providing about 70% of the value of the property used as collateral.
With all of this in mind, because hard money business loans are dependent on the collateral you’re offering, they’re often considered bad credit business loans. Business owners with bad credit, little time in business, or other less-than-ideal qualifications can still apply and be approved for this type of financing. In this way, hard money loans are thought of as a “worst-case scenario” solution for financing a business—you may be able to qualify for a hard money business loan when you can’t qualify for any other type of financing.
Considering that hard money business loans are a non-traditional way of financing, you may now be wondering where to find them.
Generally, due to the nature of these loans, hard money lenders are usually not banks or reputable online lenders.
Because of the lenient requirements involved with evaluating and funding these loans, hard money lenders must have greater flexibility—they can’t be held to the same strict regulations that banks and similar small business lenders are when it comes to business loans.
Therefore, hard money lenders are often private individuals, private funding groups, or smaller lending organizations that see value in making such a risky type of deal.
As you can see, there is definite risk involved with hard money business loans, much more so than with most other types of financing.
So, is a hard money loan right for your business?
Ultimately, with any type of business loan or financing option, it’s worth considering both the benefits and drawbacks of taking on a hard money loan.
Here are some pros and cons you’ll want to keep in mind:
Realistically, there aren’t many strong advantages to using a hard money business loan as a financing solution. Nevertheless, here are three benefits of these loans:
The disadvantages of hard money business loans really make this kind of financing a last-resort option for business owners. Here are two weighty drawbacks to consider:
Hard money loans should be considered a last resort for most business owners.
With the significant disadvantages associated with taking on a hard money business loan, you’ll want to be sure that you’ve explored and exhausted all of your other, less risky financing options before even thinking about these loans.
This being said, if you’re looking for a hard money loan because you don’t think you can qualify for most business loans, you might consider the following alternatives, which have more flexible requirements that may work for your business:
First, if you’re a B2B business who invoices customers for your services, you might look into invoice financing.
Invoice financing allows you to secure financing by using your outstanding invoices as a form of collateral. So, if you need funding because your business’s cash flow is tied up in unfulfilled invoices, then this option will be your best bet. Whereas hard money loans will take your valuable assets as collateral, invoice financing will only be secured by your business’s invoices.
Additionally, invoice financing is surprisingly easy to qualify for—as many lenders will evaluate your customer’s repayment habits more closely than your business’s qualifications. Moreover, with most online lenders, you can apply and receive invoice financing very quickly, even in as little as one day. Plus, although invoice financing can be expensive compared to other business loan products, it will certainly be more affordable than a hard money business loan.
Another way to access secured business financing without putting valuable assets on the line is through equipment financing. Like invoice financing, equipment financing is self-securing: It’s a loan that business owners can use to purchase pieces of equipment that will, in turn, acts as collateral for the very loan used to buy it.
Therefore, unlike hard money business loans, equipment financing won’t require that you put up any external asset as collateral. Plus, because the equipment will help mitigate the risk that the lender takes on by lending to you, equipment financing lenders will be willing to lend larger loans with longer repayment terms and lower interest rates.
Of course, like invoice financing, equipment financing will only be an option if you need funds specifically to buy equipment. However, if this is applicable to your business, you may be able to work with a lender like Currency Capital, who can fund equipment financing deals of up to $150,000 within 24 hours.
Finally, if you’re considering applying for a hard money loan because you think you won’t qualify for other options, you might first look into your unsecured business funding possibilities.
Short-term loans, for instance, are a form of business loan that won’t require physical collateral, but will also be pretty accessible to a wide variety of business owners. Plus, short-term business loans are typically some of the quickest-to-fund types on loans on the market.
Moreover, unlike equipment and invoice financing, short-term loans can be used for a variety of business purposes and will range in amounts, repayment terms, and interest rates.
Therefore, before you decide to apply for a hard money business loan, you’ll want to explore your short-term loan options to see if you can find something more suitable for your business.
At the end of the day, if you’re a less-qualified borrower, and you’ve confirmed that you can’t qualify for any other business funding, then you might decide to look into a hard money business loan.
This being said, however, once again we want to remind you that hard money loans are risky and expensive—if you can’t pay back your loan, you’re risking losing valuable business (and perhaps even personal) assets.
Moreover, due to the nature of hard money loans, it can be difficult to find a trustworthy lender. If you do decide to go through this financing route, you’ll want to do some research to find a legitimate hard money lender—you can check to see if they’re registered with the Better Business Bureau, as well as look for reviews from past customers.
Ultimately, you want to be confident in your business financing decision—knowing not only that you can qualify for a certain product, but also that you can afford it, that you’re working with a reliable lender, and that you’ll actually be able to use it to fulfill your financing needs.
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.