What are Hard Money Business Loans

What are Hard Money Business Loans?

/in /by

Hard money business loans are short-term, asset-based financing solutions that are secured by real estate and funded by private lenders. Unlike traditional mortgages, these loans put little, if any, weight on credit score, income, or financial background. They’re primarily concerned with the property used as collateral.

Hard money business loans can be used in a range of different commercial or entrepreneurial settings. Businesses can use these loans to bridge a financing gap, fund property renovations, or gain access to capital when traditional lenders won’t suffice.

Why Consider Hard Money Business Loans?

Hard money loans are an asset to any business. You may consider hard money loans if you’re seeking:

  • Speed: Hard money loans deliver rapid access to capital. When you work with Source Capital, you can have your hard money loan approved in as little as 24 hours and funded within 7-10 days.
  • Flexibility: These loans offer much more flexible terms than traditional business loans. Get the terms of your loans tailored directly to your unique needs, like interest-only payments, draw schedules, and variable loan durations.
  • Asset-based lending: Hard Money Loans focus on property equity rather than creditworthiness, enabling approval even if cash flow or credit history isn’t ideal.

How Hard Money Loans Differ from Traditional Business Financing

Hard money business loans offer a unique alternative to traditional business financing. Read on to learn the many ways these loan types differ from standard business loans.

Role of Private Money Lenders vs. Bank Lenders

Traditional lending institutions like banks require extensive financial statements, tax returns, and DSCR analysis, and enforce rigid covenants. These extensive checks lead to slow approval times, often taking months to approve a business loan.

Private money lenders, on the other hand, make lending decisions that are typically solely based on the financial strength of your collateral property. This enables faster underwriting and fewer bureaucratic hoops to jump through. Businesses get hard money loans funded much more quickly.

Asset-Based Lending vs. Credit-Based Underwriting

Banks offer what’s known as credit-based loans. These hinge on credit history, profitability metrics, cash flow projections, and personal guarantees, requiring a significant amount of work to determine loan size.

Hard money business loans are asset-based. The size of the loan is tied to the LTV of the collateral property. The collateral property is also the primary source of security for the loan. There’s minimal emphasis on FICO scores, profitability, cash flow metrics, and other projections.

Use Cases: Bridge Financing, Mezzanine Financing, Short-Term Business Loans

Hard money business loans have three primary uses:

  • Bridge financing: These hard money business loans cover the gap between the purchase of a new property and the sale of an existing property. They typically have short terms, between 6-12 months. Exit strategies for bridge financing loans include refinancing into a traditional loan or paying off the loan with the proceeds of the original property.
  • Mezzanine financing: This type of financing combines senior debt and equity to fill funding shortfalls in larger commercial projects.
  • Short-term business loans: These loans address immediate capital needs to purchase equipment, build out inventory, or cover emergency expenses.

Core Features of Hard Money Business Loans

What’s involved in a hard money business loan? These are the core features of this loan type.

Collateralized Lending and Real Estate-Backed Loans

In hard money business loans, real estate serves as the primary source of collateral. They may be secured by residential flips, commercial buildings, raw land, or mixed-use properties. When a property is used to secure a loan, a lien is recorded on its title.

Loan-to-Value (LTV) Ratio Requirements

Hard money loan values are determined based on a figure known as LTV, the loan-to-value ratio. This is a ratio of the loan amount versus the value of the collateral property. Hard money loans from Source Capital have LTVs up to 65%. Generally speaking, the higher the risk of the loan, the lower the LTV.

Interest Rates, Risk-Based Pricing, and Loan Origination Fees

Interest rates on hard money business loans can fall anywhere from 8% to 15%. At Source Capital, we’re proud to offer competitive interest rates between 8.99% and 11.99% for first position loans and 11.99% to 13.99% for second position loans. Your exact interest rate depends on the risk associated with your loan, determined using your collateral property, LTV, project complexity, and other factors.

Along with the interest rate of your loan, hard money business loans also have loan origination fees, a one-time fee starting at 2%. Lenders are also responsible for closing costs for appraisals, title, and legal work.

Typical Terms, Repayment Schedules, and Bridge Loan Timelines

These loans have much shorter terms than other loan types. They typically span between 6 and 36 months. Bridge loans in particular are capped at 12 months, though in some cases extensions can be negotiated.

Depending on the hard money business loan type, these loans also may be structured with interest-only payments throughout the duration of the loan and the principal due at maturity.

Due Diligence, Underwriting Process, and Funding Speed

Underwriting for hard money business loans is a generally straightforward process. It centers on recent appraisals of the collateral property, title checks, environmental reviews, and a basic background check on the borrower. This, combined with the minimal documentation requirements, means funding can occur in as little as 10 business days after application.

Who Qualifies for Hard Money Business Loans?

Interested in a hard money business loan? Use these guidelines to determine if you qualify for this loan type.

Evaluating Collateral Value and LTV Ratio

When assessing a collateral property, lenders generally order appraisals or use internal underwriting value models to determine its worth. They also look at factors like property condition and location.

The borrower’s equity also plays a significant role in this process. Generally speaking, the greater equity the borrower has in the property, the higher the loan amount.

Credit History vs. Asset-Based Approval

Credit plays very little role in hard money business loans, if any. Low credit scores, past bankruptcies, and other flaws in credit history are typically not an issue. Hard money lenders are much more interested in property value, equity, and loan exit plan. Borrowers with a demonstrated track record in real estate or business operations may have a stronger chance of approval, too.

Common Industries and Commercial Lending Use Cases

Hard money business loans are often utilized by:

  • Real estate flippers: Hard money loans may cover the cost of the purchase as well as the cost of remodeling.
  • Property developers: Commercial and residential properties are eligible for hard money loans.
  • Hospitality remodelers: These loans can be used to bring outdated hospitality properties into the modern age.
  • Small manufacturers: Those seeking quick infusions of capital can benefit from hard money loans.
  • Businesses: Many look to hard money business loans for rapid inventory or equipment financing when traditional lending sources are maxed out.

How to Secure a Hard Money Business Loan

Preparing to apply for a hard money business loan? Read on to learn what to expect.

Gathering Required Financial Documentation

Before applying for your hard money business loan, it’s important to get all your documentation in order. Depending on your loan type, this may include a concise business plan, project pro forma, property purchase agreements, rehab budgets, or contractor bids.

It can also be helpful to include personal financial statements, recent bank statements, or proof of relevant project experience, but these aren’t generally necessary to get approved for a hard money loan for your business.

Selecting the Right Hard Money Lender

Once you’ve prepared your documentation, it’s time to select your lender. Spend time compiling a list of potential lenders, then compare them by interest rate, origination fees, LTV limits, and funding speed.

It’s also a good idea to review their reputation. Verify their licensing or state registrations, speak with past borrowers, or research case studies, testimonials, and similar deals.

Submitting Your Application and Underwriting Steps

Next, it’s time to compile and submit your application. Submit an executive summary that outlines your loan purpose, exit strategy, and timeline. Be sure to include any necessary documentation that helps prove your claims or supports your exit strategy.

Once your application is submitted, you can expect your lender to visit your property, order an appraisal, and review your title report. If all is in order, you should get loan approval.

Closing the Loan and Accessing Funds

After your loan is approved, your lender will coordinate title work, loan documents, and closing statements in parallel. This expedites both your loan signing and funding. Once your loan is signed, you’ll receive your funds. In most cases, funds are dispersed in a lump sum. If you’re borrowing for a rehab project, funds may be dispersed via a draw schedule, instead.

Advantages of Hard Money Business Lending

Why take out a hard money business loan instead of a traditional loan? Let’s review the advantages of hard money business lending.

Speedy Funding for Time-Sensitive Projects

Hard money loans are ideal when you need funding fast. The speed of hard money lending means you’ll never miss out on an excellent investment opportunity or get access to quick capital for emergency business needs.

Flexible Underwriting Standards

Hard money loans offer incredibly flexible terms, including interest-only options, variable schedules, and tailored LTV ratios. This helps them align more closely with your project specifics than traditional bank loans.

Financing Opportunities Despite Challenging Credit

When borrowers with credit blemishes are turned away from traditional lenders, they can turn towards hard money loans. This allows veteran and first-time borrowers alike to secure capital, regardless of financial history.

Drawbacks and Risks of Hard Money Business Loans

There are some risks to consider when taking out a hard money loan. Read on to learn some of the drawbacks of this loan type.

Higher Interest Rates and Fees

Generally speaking, hard money business loans tend to have higher interest rates and fees to compensate for their higher risk. It’s vital to compare overall APR, including origination fee and closing costs, to a traditional loan to get the whole picture of your hard money business loan.

Shorter Terms and Refinancing Risk

Not only can hard money business loans be greater risk for the lender, but they can be greater risk for the borrower, too. Their shorter loan terms mean borrowers need a clear and feasible exit strategy, whether that may be refinancing or paying off the loan another way.

If a borrower fails to pay off their loan in time, they risk their collateral property going into foreclosure.

Impact on Cash Flow and Exit Strategy

If your hard money loan is structured with interest-only payments throughout the duration, you’ll need to plan for the lump-sum principal payment at maturity. Without proper preparation, this can lead to serious cash flow issues. If you plan on refinancing, you’ll need to begin the application process far ahead of time to meet the deadline.

Common Pitfalls and How to Avoid Them

Don’t make these common mistakes with your hard money business loan.

Underestimating Total Cost of Borrowing

Remember, the total cost of your loan isn’t just the principal amount. Your total cost includes the origination fee, inspection fees, insurance, and interest. If your hard money business loan is for a construction project, it’s also wise to put some funds aside in case you need to extend your loan.

Failing to Plan a Clear Payoff or Exit Strategy

It’s also vital to have a realistic and attainable exit strategy, and wise to have a backup, too. Be realistic about sale timelines, refinancing possibilities, or your ability to improve cash flow before your loan matures. Remember that your collateral property is literally on the line and plan accordingly.

Frequently Asked Questions

What Loan Amounts Are Available for Hard Money Business Loans?

Hard money business loans from Source Capital are available in amounts ranging from $100,000 up to $5 million.

How Are Interest Rates Determined on Hard Money Loans?

Interest rates on hard money business loans are generally based on risk. Lenders will look at a range of factors, including your loan LTV, loan terms, property type, and other criteria to determine the risk associated with your loan. In some cases, proven experience with hard money loans can result in a lower interest rate, too.

Can Startups or New Ventures Qualify for Hard Money Financing?

Anyone can qualify for hard money financing. Hard money lenders are primarily focused on the collateral property used to secure your loan. While business stability and experience may result in a lower interest rate, it’s not a requirement for these loan types.

What Types of Collateral Are Acceptable?

Hard money business loans from Source Capital can be secured using the following property types as collateral:

  • Owner-occupied and non-owner occupied residences
  • Multifamily buildings
  • Commercial properties
  • Industrial properties
  • Offices
  • Retail spaces
  • Mixed use properties

How Long Does It Take to Close a Hard Money Loan?

Hard money loans close much more quickly than traditional mortgages. At Source Capital, we approve hard money loans within 24 hours and fund loans within 7-10 days.

Conclusion: Using Hard Money Loans to Fuel Business Growth

Hard money business loans provide businesses with swift access to capital over short timelines. If you’re planning on pursuing this loan type, it’s important to carefully match your loan structure to your project goals and exit strategy. To protect yourself from foreclosure, be realistic about your project and how you’ll pay off your hard money loan.

Ready to access the funds you need to achieve your goals? Meet Source Capital. Our hard money lending experts have 40 years of combined experience and have provided funding for over $550 million in loans. Contact us today to get started.