When you have a cash flow problem, the first thing that might come to mind is taking out an online payday loan. This can be tempting, since most of us don’t like the idea of turning to expensive credit options to get an emergency fund or fix a big financial problem. However, borrowing from high-interest personal loans or payday lenders can quickly spiral out of control if you’re not careful and strategic about your financing options. That’s where hard money loans come in.
These are more expensive loans than standard consumer or mortgage loans, but they also have higher standards for applicants. In this post, we’ll explain everything you need to know about hard money lending, so you can make an informed decision before exploring other options.
What is a Hard Money Loan?
A hard money loan is a loan that is primarily funded by another source, like a private equity investor or a venture capital fund. Unlike traditional lending where a bank or credit union loan officer applies for and lends the money to a borrower, an investor who loans money in this manner will usually have no direct involvement with the borrower. A private equity or venture capital investor purchases equity in a company, selects a loan that will help the company grow, usually by expanding, acquiring another company or increasing the amount of debt. Private equity investors may also be involved in the management of the company.
The investors are typically looking for high-return projects that could lead to higher returns, meaning they want projects with potential for high returns. A private equity fund typically has more than one hundred investors, and they may invest in hundreds of companies. That’s why it’s important to do your research to find a reputable fund before approaching anyone with a loan request.
What Do Hard Moneylenders Look for in a Loan Request?
Like other lenders, hard moneylenders will consider many factors when deciding whether to loan you money. Regardless of their investment and loan terms, the lender must be confident in both the borrower and the project. The risk/reward ratio is key. The risk of losing the money is higher than the return, so the lender must feel confident that the return is worth the risk. Investors look for ways to reduce risk.
One way they do this is to look closely at the debt and equity positions of the business and how the money will be used. If the loan applicant is using their own personal assets and equity, the lender is less concerned with the risk associated with taking on this kind of liability. That’s why business loans are typically more expensive and less flexible than consumer loans.
Types of Hard Money Loans
– Bridge Loans — A bridge loan is typically used to bridge a gap between investments, as described above. The loan will usually be repaid as soon as the first investment is returned, usually after one to three years.
– Accelerated Repayment Loans — This is a short-term loan where the interest is higher than the term. Typically, the repayment period is about one to three years.
– Equipment Loans — This type of loan is typically for large machinery, like a drill rig or a machine that can produce a high volume of a specific product.
Who are Hard Money Lenders
Hard moneylenders are private equity and venture capital investors. They typically loan money in these types of projects and are looking for high returns with a high level of risk. These are typically high-net-worth individuals and some family offices who invest in this way. However, some online lenders also offer hard money loans. These are generally online lenders who offer loans in any amount, but they are not high net worth individuals.
These types of online lenders typically offer high-cost, high-risk loans that are hard to qualify for due to high interest rates and bad terms. These are intended for cash-strapped business owners who may not have the traditional or liquid assets to qualify for a standard bank loan. When researching these lenders, it’s important to look closely at the loan application and choose a high-quality lender.
Pros and Cons Hard Money Loan
There are many advantages to hard money loans, but there are also risks. Compared to other sources of financing, these loans are usually more expensive, which means you may have to bring more equity or collateral to get a loan. Payoff terms are typically short, often a single year and one or two years. However, the interest rate can be much higher than a standard bank loan.
There are also no government regulations to protect you from default or bankruptcy. If the business fails and the loan is not repaid, the lender can liquidate the assets to repay it. If you decide to pursue a hard money loan, make sure you do your research and find a reputable lender. There are some shady lenders who offer high-risk loans, so make sure the investment is worth the risk.
How much does a hard money loan cost?
This is dependent on a number of factors, like the amount of the loan, the risk of the project, the length of the loan and the interest rate. Most online lenders have a standard rate, and some will offer financing through a program that has a government-backed mortgage. You’ll have to meet a minimum credit score and loan amount for these programs. Generally, a hard money loan will cost between 10% and 20% of the project value.
One last thing — Be wary of scams!
No matter what type of loan you decide to take out, be wary of any lender who pressures you for quick decisions or asks for money up front for any project. Remember, a loan is a financial commitment, so always do your research and work with a lender who is willing to work with you to find the right solution for your needs and budget.
