Advantages and Disadvantages of Commercial Hard Money Loans That You Should Know

Commercial hard money loans are a financing tool used by real estate investors. Before you proceed to apply for commercial hard money loans, you must know their advantages and disadvantages.

last updated Sunday, July 13, 2025
#COMMERCIAL HARD MONEY LOANS #Commercial hard money loans

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by John Burson

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Commercial hard money loans are a financing tool used by real estate investors. However, only experienced real estate investors know how to navigate the intricacies of these loans. Less experienced investors can also learn about them and make more informed financial decisions for their future projects. Before applying for commercial hard money loans, you must know their advantages and disadvantages.

3 Advantages of Commercial Hard Money Loans

Fast Approval and Funding

The most common advantage of commercial hard money loans is their speedy approval and funding. These loans can be processed within a day because the lender will only consider the property, your equity or down payment, the exit strategy for the specific property, your experience, and cash reserves to make the monthly payments.

A Few Requirements to Get Approved

Commercial hard money loans have fewer requirements compared to bank loans. Some of these requirements include having sufficient cash to make monthly loan payments, adequate equity in the property, relevant experience in some cases, and a reasonable exit strategy. Because these types of loans have fewer requirements, their approval chances are high. On the other hand, banks have strict and lengthy requirements that make getting loan approval difficult.

Commercial Hard Money Loans Can be Used to Fund Projects that Aren't Financed Elsewhere

Most commercial hard money loan providers approve loans that banks cannot. For instance, fix-and-flip loans. This involves purchasing a property after applying for short-term commercial hard money loans and making the necessary repairs to prepare it for sale. Because the property is to be sold as quickly as possible, you will only need a 12-month loan, which conventional lenders don't offer.

3 Disadvantages of Commercial Hard Money Loans

Although commercial hard money loans are approved quickly, they have some less-than-ideal aspects.

Commercial Hard Money Loans typically have higher interest rates compared to Bank Loans.

The interest rates of commercial hard money loans are typically higher than those of bank loans. This is usually due to the lender's risk assessment and the convenience of having quick access to funds. The interest rates for hard money loans range from 9% to 15%, depending on some factors. Your commercial hard money loan lender will also charge a small loan origination fee, commonly referred to as points. These points range from 2 to 4, but some lenders may charge more in certain situations.

Commercial Hard Money Loans are Meant For short-term use only.

Most commercial hard money loans are set for 1 to 2 years, while longer terms range from 3 to 5 years. The longer the loan term, the higher the risk your lender is taking because it's difficult to predict future interest rates by the end of the term. If interest rates drop, you will have the option to refinance your loan to take advantage of the lower current rates. On the other hand, when the rates increase, you will keep the lower interest rate while the lender waits for the loan to become due. When your lender holds the loan until it becomes due, they will earn less than a new trust deed investment at the current rates. Lenders often offer shorter loan terms because they take on this risk.

They Require Equity or a Down Payment of At Least 25% to 30%

Lenders of commercial hard money loans often overlook other shortcomings because they require sufficient equity in a property as security. They use the 'hard' asset as security, while banks focus more on clean credit reports and income.

 
 
 

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