If your company is in a position where you can not qualify for a traditional commercial loan, but you need money to complete a project or for another reason, a hard money loan may be a route you can take. Hard money loans are not traditional, alternative sources of small business financing
What is a hard money loan?
A hard money loan is a risky asset-based loan used by companies that can not qualify for other types of loans to fund their operations.
If a project arises in which a small business wants to invest or if a business has exhausted its lines of credit, they can resort to hard cash loans for their needs. Hard money loans are placed with private investors, banks, mortgage companies and even the Small Business Administration. Hard money loans for small businesses should only be used for emergency needs due to their high interest rates.
How do you qualify for a hard money loan?
Hard money loans are not based on the credibility of the borrower. Instead, they are based on the collateral you can offer the lender. Your credit score is usually not considered. Only the collateral you can offer to the lender is considered a hard money loan. Usually, the full value of the warranty is not used. Instead, a loan for value is calculated for the hard money loan. The loan / value ratio is a percentage of the property value.
If the collateral you offer for the loan is not enough to secure the loan, you may have to offer personal resources to secure the loan.
What is a Loan to Value Relationship?
A loan to value amount for a hard cash loan is calculated as the loan’s value / appraised value of the property. The higher the ratio, the harder it is to get a loan.
Generally, hard money lenders lend only about 70% of the property’s value. The loan / value ratio is a measure of risk to lenders.
Here’s an example. Let’s say the XYZ Company wants to take advantage of a project that costs $ 125,000. They need to lend $ 90,000 to invest in this project, but they can not get the money from any traditional lender. They approach a hard money lender who calculates their loan / value ratio. Its ratio is $ 90,000 / $ 125,000 =. 72 = 72%. Depending on the guidelines imposed by that particular hard money lender, they may or may not lend 72% of the property’s value. If they do not provide 72% of the cost of the project, the XYZ Company can approach another hard money lender.
What is the interest rate and other terms on a hard money loan?
Interest rates are higher on hard money loans than on traditional commercial loans. The reason is that hard money loans are riskier than traditional loans. The other terms in a hard money loan are also less favorable than in traditional loans.
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Interest rates can start at around 12% and go up to 29%. Small businesses usually also need to pay 4% – 8% in points. The 70% loan to the value is usually the maximum value loan amount that a hard money lender will accept.
A balloon payment may be required somewhere along the way. The loan term is usually short – as short as 1-5 years.
Hard Money Lenders
Hard money lenders are individuals or companies that have funds available for investment. To be a hard money lender, they have to be flexible and able to move quickly to take advantage of the loan opportunities in the market. They are not restricted to the strict criteria of traditional business loans and traditional business sources here you can check a trusted hard money loan in california suggests.
Although you may have to go through several hard money lenders to find one that suits your needs, all you need to do is a simple internet search to find hundreds of companies that are dedicated to hard cash loans.