Hard Money Business Loans: How They Work and Alternatives

Hard money business loans are a type of loan that is backed by assets such as commercial real estate or land.

These loans rely heavily on the value of the collateral, as opposed to traditional loan requirements, and are often utilized by business owners who are unable to meet other loan requirements. small business loans option. However, hard money loans can be risky due to their high interest rates and short repayment terms.

Hard money loans are typically provided by individual investors or lenders rather than banks or credit unions. These lenders underwrite applications primarily based on the value of the collateral, rather than focusing on traditional criteria such as credit scores and business finances.

The value of the collateral also affects the loan amount. Hard money lenders typically Loan-to-value ratioor LTV, to determine the amount of capital you are eligible to receive and assess the risk of lending to your business.

LTV is calculated by dividing the loan amount by your value. collateral. For example, let's say your collateral is worth $100,000. To avoid undue risk, the lender decides to offer you a loan of $65,000. This results in a LTV of 65%. $65,000 / $100,000 = 0.65, or 65%.

Hard money lenders typically offer loan amounts with LTVs in the 50% to 75% range, while traditional lenders may offer 80% to 90%.

Hard money loans are typically considered riskier than other types of business loans because these loans are tied directly to the value of the property. As a result, interest rates tend to be higher and repayment periods shorter.

If you're thinking about applying for a hard money loan but don't need the money right away, you may want to take a step back and consider the following: build trust And cash flow. This will improve your qualifications and help you get a more competitive loan when you apply.

On the other hand, if you need money more quickly, you may want to consider other business financing options such as:

Invoice factoring is a good option for business-to-business companies that are strapped for cash in unpaid invoices. Factoring is another type asset-based finance It may also be available to borrowers who don't have access to traditional loan options.

and invoice factoringSell ​​your unpaid invoices to a factoring company at a discount. The company prepays a certain percentage of the invoice and is responsible for collecting payment from the customer.

As with hard money loans, lenders often focus on the amount of the invoice and the customer's payment history when evaluating applications. For this reason, invoice factoring can also be a good option for startups and borrowers with bad credit.

Like hard money loans and invoice factoring, equipment financing is also a type of asset financing. With an equipment loan, you can get financing for up to 100% of the price of the equipment you're considering purchasing. The loan is repaid over time with interest, and the purchased equipment acts as collateral.

Equipment financing is an affordable way to purchase machinery for your business and is easier to qualify for than other business loans. Equipment lenders will check your personal credit and business finances, but a lot may depend on the value of the equipment you are purchasing.

Short-term loans provide quick funds 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.

Just like hard money loans, short term business loan Although they tend to have flexible eligibility requirements, these loans are less dependent on collateral. If you have a credit score of 500 or higher and have been in business for at least six months, you may be able to qualify for a short-term loan. Many short-term loans do not require any physical collateral at all and are instead secured by collateral. UCC Lien and personal guarantee.