Hard Money Business Loans: What They Are and When to Get One
Although hard money loans can offer quick and easy funds, business owners should be wary of their high rates and short terms.
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Updated · 4 min read
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Managing Editor Key takeaways
- Hard money business loans focus heavily on the value of the asset backing the loan, as opposed to qualification requirements like credit score and business financials.
- Although they come with more lenient qualification requirements, hard money business loans have higher interest rates and less favorable repayment terms, making them riskier than many other loans.
- Invoice factoring, equipment financing and short-term loans can all be good alternatives to hard money loans.
If you own high-value real estate, you may be able to leverage it to get a hard money business loan. Although these loans provide fast financing, they can also be risky — with high interest rates and short repayment terms. And, if you can’t repay, you could lose your property.
What is a hard money business loan?
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.
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Who offers hard money loans
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.
How lenders determine your loan amount
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.
What is LTV?
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%.
Typical LTV ranges
Hard money lenders typically offer loan amounts with LTVs that range from 50% to 75%, whereas traditional lenders may offer 80% to 90%.
Why hard money loans are expensive
Because these loans are tied directly to the value of your assets, not your business operations, 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.
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.
When to consider a hard money business loan
You might consider a hard money business loan if:
- You need immediate financing and can’t wait for capital.
- You’re a new business or have a low credit score and can’t qualify for other options.
- You need a short-term option to bridge a gap in funding.
- You need financing for a fix-and-flip project.
On the other hand, you should avoid a hard money business loan if:
- You can qualify for more traditional financing.
- You need a long-term funding solution.
- You’re not sure if you can repay the loan over a short period of time.
- You don’t want to risk losing your property if you can’t repay.
Alternatives to hard money business loans
If you need fast funding, but aren’t sure that a hard money loan is right for you, you might consider other business funding options, such as:
Invoice factoring
Best for: Business-to-business companies with cash tied up in unpaid invoices.
AltLINE AltLINE - Invoice factoring
Max Loan Amount
$5,000,000 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
Best for: Purchasing machinery or equipment.
National Funding National Funding - Equipment financing
Max Loan Amount
$150,000 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.
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 — making it easier to qualify for than other business loans.
Short-term loans
Best for: Working capital, short-term investments in your business.
Fora Financial Fora Financial - Online term loan
Max Loan Amount
$1,500,000 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.
Frequently asked questions
Is a hard money loan a good idea?
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.
Do hard money loans require a down payment?
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.
Are there hard money business loans for bad credit?
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.
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