What is a Hard Money Lender?

Hard money financial lenders are companies or individuals that have readily available funds for investment. Hard money financial lenders have to be very flexible and must have the ability to move very quickly in order to make the most of key lending opportunities that are available in the marketplace. These kinds of lenders are not, however, limited to the strict criteria of conventional business loans and sources.

Even though you may have to look at a number of hard equity lenders in order to find the ideal one that will ultimately accommodate all your needs, you can do a quick search in Google to find literally hundreds of available companies that participate in hard equity loan financing. They’re different in many aspects, so be sure to do your homework first to understand everything they offer.

If you and your business are in a position where you’re not eligible for a traditional loan but still require capital for one reason or another, then you may be able to take advantage of a hard equity loan instead. Hard money loans are alternative, non-traditional sources of financing for small businesses. They’re primarily used if you’re unable to qualify for traditional financing for your business needs through standard financing sources or if you need money somewhat fast and you don’t have the time to wait to be approved by conventional commercial financing.

What is a Hard Equity Loan Financing?

Hard equity loan financing is more of a risky type of loan that’s used by companies or individuals that aren’t able to quality for any other kind of loan in order to finance their business operations. A project may be on the table that a small business desires to invest in but they’ve already used all their lines of business credit. Sometimes, they can get a hard equity money loan instead in order to suffice their needs.

Hard equity loans are often placed with mortgage companies, banks, private investors, and even the SBA (Small Business Administration).

The interest rates of hard equity loans are even higher than standard subprime loans in most cases. Because traditional financial lenders, like banks, don’t offer hard equity loans, most hard money lenders are private individuals or groups that see the potential value in this kind of risky business venture. These types of loans are used in short-term financing, turnaround situations, or by borrowers with less than adequate credit but have a significant amount of equity in their property who want to ultimately avoid foreclosure. For smaller businesses, hard equity loans are typically only used as a last resort due to the unusually high interest rates.

Qualifying for Hard Loan Financing

Hard loan financing isn’t based on the borrower’s creditworthiness, but instead based on how much collateral the borrower can actually offer the lender. Usually, a credit score isn’t even a factor. The collateral itself is the primary deciding factor whether or not you’ll get the loan.

In most cases, the collateral’s entire value isn’t even necessary. The LTV (loan to value ratio) is used to calculate the hard equity financing loan amount. The LTV refers to a percentage of the overall value of a property. In other words, if your collateral isn’t enough to get the loan you want, it may be necessary to offer additional real estate or other personal assets as collateral.

Definition of Loan to Value Ratio (LTV)

As mentioned, the LTV is basically calculated as appraised value or loan value of your property. A loan is more difficult to secure, the higher the ratio. More often than not, hard money financial lenders usually loan out approximately 70 percent of the overall value of a property. Lenders use LTV as an important way to measure risk.

Hard Money Loan Interest Rates

The interest rates regarding hard money loans are substantially higher than more traditional business loan financing. This is because hard equity financing is riskier in general. Some of the other terms are generally less favorable as well.

In most cases, interest rates start at about 9 percent and can go as high as 13 percent. Usually, small businesses also have to pay around 3-6 percent in points. Typically, 70 percent of the loan to value is the maximum LTV a hard money financial lender accepts. Many times, a balloon payment is required along the way at some point, while the general term of the loan is often short, usually 1-5 years.

Who Uses Hard Equity Loans?

If you’re someone who just bought a new home but haven’t sold your current one yet, you may qualify for hard money bridge financing, which is usually short-term. Other hard equity loan users may be homeowners who have poor credit but a great deal of equity in their property who are trying to prevent foreclosure.

If you find yourself in a tricky situation whether you’re facing foreclosure or want to engage in a unique business opportunity, hard equity financing may be a good solution for you.