Is a Hard Money Loan Right for Your Business?

Although hard money loans can offer quick and easy funds, business owners should be wary of their high rates and short terms.
Randa Kriss
By Randa Kriss 
Updated
Edited by Sally Lauckner

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A hard money business loan is a type of loan backed by property, such as commercial real estate or land.

Because these loans rely heavily on the value of your collateral — as opposed to more traditional loan requirements — they’re often used by business owners who can’t qualify for other small-business loan options. However, hard money loans can be risky, with high interest rates and short repayment terms.

Here’s what you need to know about hard money business loans, how they work and what to note before choosing one for your financing needs.

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How hard money business loans work

Hard money loans are usually offered by private investors or lenders, as opposed to banks or credit unions. These lenders underwrite your application based largely on the value of your collateral, instead of focusing on more traditional criteria, such as your credit score and business finances.

The value of your collateral also impacts your loan amount. Hard money lenders generally use the loan-to-value ratio, or LTV, to determine how much capital you’re eligible to receive and to assess the risk of lending to your business.

LTV is calculated by dividing the loan amount you borrow by the value of your collateral. For example, say your collateral is worth $100,000. To avoid taking on too much risk, the lender decides to offer you a $65,000 loan. That would make your LTV 65%: $65,000 / $100,000 = 0.65, or 65%.

Hard money lenders typically offer loan amounts with LTVs that range from 50% to 75%, whereas traditional lenders may offer 80% to 90%.

Because these loans are tied directly to the value of your assets, hard money loans are usually considered riskier than other types of business loans. As a result, they tend to have high interest rates and short repayment terms.

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NerdWallet rating 

5.0

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NerdWallet rating 

5.0

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NerdWallet rating 

4.5

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Est. APR 

20.00-50.00%

Est. APR 

35.40-99.90%

Est. APR 

15.22-45.00%

Min. credit score 

625

Min. credit score 

625

Min. credit score 

660

Pros and cons of hard money business loans

Pros

  • Can be used for a variety of purposes. Although hard money loans are often used in real estate projects, like fix and flip loans, they can serve different short-term purposes. You can use a hard money loan for working capital, debt refinancing or consolidation, as well as bridge financing.

  • Fast access to funds. Some hard money lenders may be able to approve your application within 24 hours and provide funding in as little as one to two business days. Traditional bank loans, on the other hand, can take several weeks or even months to qualify. Banks also tend to require document-heavy applications and may require you to apply in person. Many hard money lenders offer streamlined, online applications with minimal documentation.

  • Easy to qualify. Hard money business loan requirements are largely based on the value of your collateral. Although lenders may look at your credit score, time in business and business finances, they don’t typically weigh these factors as heavily when underwriting your application. Businesses with bad credit and startups, therefore, may be able to qualify for hard money loans.

Cons

  • Risk level. Hard money loans can be a risky type of financing. Your loan is based largely on the value of the property you use to secure your loan. And if you can’t repay, the lender has the right to seize that collateral.

  • High interest rates and short repayment terms. Hard money lenders typically charge high interest rates to offset their risk of lending to potentially less-qualified borrowers. These loans also tend to have short repayment terms, anywhere from a few months to a few years. High rates combined with short terms can make these loans more difficult to repay than other financing options.

  • Down payment. Your lender may ask you to provide a down payment of 10% to 30% (or more) on your hard money loan. Generally, the stronger your credit and financial qualifications, the less of a down payment you’ll need to provide. However, a larger down payment may help you access better rates and terms.

Alternatives to hard money business loans

If you’re thinking about applying for a hard money loan, but you don’t need the funds immediately, you might consider taking a step back and trying to build your credit and cash flow. This way, you’ll improve your qualifications and hopefully be able to get a more competitive loan when you do apply.

On the other hand, if you need funds more quickly, you might look into some other business funding options, such as:

Invoice factoring

Invoice factoring can be a good choice for business-to-business companies with cash tied up in unpaid invoices. Factoring is another type of asset-based financing that can be accessible to borrowers who may not qualify for traditional loan options.

With invoice factoring, you sell your outstanding invoices to a factoring company at a discount. The company pays you a percentage of the invoice upfront and then assumes responsibility for collecting payment from your customers.

Similar to hard money loans, lenders often focus on the value of your invoices and your customer’s payment history when evaluating your application. For this reason, invoice factoring can also be a good option for startup companies and borrowers with bad credit.

Equipment financing

Like hard money loans and invoice factoring, equipment financing is also a type of asset-based financing. With an equipment loan, you can get funding equal to up to 100% of the value of the equipment you’re looking to purchase. You repay the loan over time, with interest, and the equipment you buy serves as collateral.

Equipment financing can be an affordable way to purchase machinery for your business — and it can be easier to qualify for than other business loans. Although equipment lenders will check your personal credit and business finances, they may rely more heavily on the value of the equipment you’re looking to buy.

Short-term loans

Short-term loans offer fast capital that can be used for a variety of purposes. These loans are available from online lenders and typically have terms of up to 18 months. 

Like hard money loans, short-term business loans tend to have flexible qualification requirements — but these loans aren’t so reliant on collateral. You may be able to qualify for a short-term loan with a minimum credit score of 500 and at least six months in business. Many short-term loans don’t require physical collateral at all, and instead are secured by a UCC lien and personal guarantee.

Find the right business loan

The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.

Frequently asked questions

A hard money loan can have a high interest rate and short repayment terms, but it can offer fast cash for borrowers who can’t qualify for other financing options. However, if you can’t repay the loan, your lender can seize your property to recoup its losses.

Based on the state of your business and your financial needs, you’ll need to determine if the potential rewards of a hard money loan outweigh the risks.

Many, but not all, hard money lenders will require a down payment. You may need to provide a down payment of 10% to 30% or more depending on your credit, finances and business history.

Yes. Because lenders rely so heavily on your collateral to evaluate your hard money loan application, they often accept borrowers with bad or fair credit.