The Pros And Cons Of a Hard Money Business Loan
There’s no shortage of individuals or organizations that are willing to lend money to your business, no matter what your qualifications may be. These can be traditional bank lenders, private money lenders, or alternative financing companies. they may all have different names, but they’re all willing to give small business owners like you a leg up.
Among the most popular alternative financing options are hard money business loans, meant for those business owners who don’t qualify for traditional loans.
And to help you understand what you, as a business owner, might be getting into with these loans, here are some things you should know:
What Is a Hard Money Loan?
Hard money loans are used by both business owners and consumers, not necessarily specific to business financing. The simplest way explain a hard money loan is this: hard money loans are asset-based, backed by the value of some form of asset. Usually, this asset comes in the form of a home.
Generally, the property has at least 30% to 50% equity, so that the hard money lenders involved will be protected in case the borrower defaults.
Using a Hard Money Loan For Business
If you’re looking at contacting one of many hard money lenders for a loan, you should weigh the costs and the benefits of using this form of financing. You want to make sure you know what exactly you’re getting into. Let’s take a closer look at some of the advantages and risks you could be taking with one of these loans:
- Easy To Qualify
Hard money business loans don’t consider your credit score like other business loans do. This means that they’re much easier to qualify for than a traditional business loan. However, you need to have sufficient collateral to offer up to the lender to qualify.
- Easy To Apply
Unlike traditional loans that often require hours of preparing documents and information that is needed to fill your application, hard money lenders only need to look at your collateral to see if you qualify. This makes it easier to work out the terms of the loan.
- Fast Financing
Along with the ease of the application, hard money lenders often offer access to capital quicker than a traditional loan provider. This means you can get financing for your business on short notice if you need money fast.
- A Risky Way To Finance
This can present a major risk to your business if you default on the loan, with all the value of your business’s property on the line. If you can’t pay back the loan, the lender has the right to seize whatever you offered as collateral to recoup their losses. Worst case scenario: you lose both business and personal assets.
Because a lender can assume a lot of risk to lending to clients with poor credit scores, they can sometimes attach a high-interest rate to a hard money business loan. By charging this high rate, they make up for the risk that you might default on the loan at some point.
In the end, only you can decide if its in your business’s best interest to apply for a hard money loan. It can be a great way to secure needed financing fast for a contract or an expansion you know will bring more income than the loan costs.