Business financing is more difficult to obtain today due to current economic circumstances and the high default rates experienced by banks and other traditional lenders. For businesses seeking to expand or start-up enterprises that need funding, the traditional route is increasingly demanding and time-consuming to navigate. Credit qualifications are tighter with traditional lenders more cautious than ever. If the loan is approved, it can take months before it is actually funded. This can result in missed opportunities if, for example, the loan is for a valuable and coveted piece of property that will be snatched up by someone else before the funding comes through.
There are other financing options through private lenders. Known as hard money loans, private hard money lenders are typically wealthy investors, private equity groups, or hedge funds that offer direct loans based on the value of the collateral, or property, upon which the loan is secured. Depending on the owner’s equity in the property, these asset-based loans are approved or disapproved based on the property value more than the credit-worthiness of the applicant. Since the loan is secured by tangible property, a hard money loan can be advantageous for those who may have blemishes on their credit or a recent bankruptcy that results in disapproval by a traditional lender.
Private hard money loans provide funding much quicker than traditional loans that can take months for approval and funding, offering the advantage of quick cash when it’s needed. They require little income documentation and do not require the approval of a hierarchy of loan committees. If your deal appears sound, approval and funding can come through in a matter of days.
The interest rates for hard money loans are significantly higher than traditional loans, usually 15% to 17% and sometimes up to 25%. They are typically designed to be short duration bridge loans, allowing the business owner time to arrange for traditional long-term, low interest financing or make the money expected from the deal to purchase the property. For example, a foreclosure property may come available for a cash purchase far below market value. A private hard money loan can provide the quick cash to buy the property and turn it for a considerable profit within a few months at which time the loan can be repaid and the profit realized. Or, the property can be rented at which time a traditional loan may be approved.
For all of these reasons, private hard money lenders can be an excellent source of funding for a short term loan. For quick cash regardless of credit history, a hard money loan may be the answer to business opportunities that would be lost through the traditional loan route.