Are Hard Money Loans the Ultimate First Aid for Small Business Owners?

When people have to borrow money, they usually seek the help of a bank or other financial institution. However, you also have the option of obtaining funds through a hard money lender. 

These lenders are sometimes those who can save you in difficult financial situations, but because they do not work in the same way as regular lenders, you should be cautious.

Definition

A hard money lender is a person or a group of people who provide loans for their personal assets. They are not affiliated with financial institutions and operate independently.

Since they are not affiliated with financial groups, they do not have to follow traditional lender rules. In fact, they usually examine current markets and determine which niches are not being served by conventional lenders. Hard money lenders set their own standards and deadlines, so you can get very different offers depending on the investor you go to.

Prominent hard money lenders from California also state that requesting this type of loan by a company is not a rare phenomenon. Corporations may choose to use this type of loan format to secure the necessary capital in a short period. Given all that is required is proof of ownership of the assets that are used as collateral, the response time in obtaining this type of loan is short. 

Very often, hard money lenders are associated with real estate, especially those related to businesses. For example, many hard money borrowers cover the cost of repairs to the property or the purchase of initial supplies from a store. 

However, technically, these private lenders can provide loans to any company that is perceived as fruitful in providing a good return on investment. People look for hard money lenders when they can't get traditional loans, or when they need to get the funds faster.

Applications

Often, banks do not get involved in these types of loans, but hard money lenders and mortgage companies extend this option. This method of asset-based financing can be the ideal solution for people who have gone through a recent downturn with their credit, but still have a property title, to access loans and restore good credit history at the same time.

There are a couple of inconveniences for the average hard money loan. First, the interest rate associated with these types of loans is usually higher than a bank loan that is based on good credit history. 

It means that during the life of the loan, the borrower will have to pay more in service fees. Second, the loan that can be obtained from a hard money lender does not always come with the same level of consumer protection extended through traditional bank loans.

For example, the lender may include a clause in the loan contract that limits the grace period for each payment, and may also have the right to seize the property if even payment is received after the grace period.

Hard money loans can also be used as one of the great small business owner hacks. Sometimes, a money loan that can be used as a provisional measure to finance necessary projects while a long term loan contract is drawn up.

Interests

Because hard money lenders use their own resources to grant loans, they run a greater risk than traditional lenders. They also have more than one risk, since they lend to people who have not been able to access traditional funds, such as those who have bad credit. 

Consequently, they charge more in commissions and interest, the rate can be around 20%, and some lenders charge up to 10% of the loan just to close the deal. 

Usually, they also require collateral, that is, they only offer secured loans, which is often the property you are looking to buy. However, because these private lenders are more concerned about the potential return on investment than your credit score, you should not be surprised to see eyepopping interest rates offered by some lenders.

In Conclusion

Hard money loans are loan agreements that support the amount of the real estate loan that is owned by the borrower. With a hard money loan, the lender does not take into account the current solvency status of the borrower. 

While the property used to secure the loan is sufficient to cover the balance and interest rates involved in the transaction, the lender has the assurance of being able to recover the losses suffered by the default.

All hard money lenders want to make money; at the end of the day, they are all just investors looking to increase their own gain. Also be careful since not all lenders of hard money are legal, too. Some private lenders are usurers who will use intimidation tactics and other unethical practices to get them to pay what you owe, so you may want to approach these lenders with great caution. 

This should not prevent the use of a private money lender, as many have committed to operating by sound business practices, but take the time to compare options and the reputation of each financial institution. As with all loans, reading and understanding your private loan agreement is highly recommended, and do not sign anything if you do not clearly understand the terms and conditions.