Hard Money Loans for Small Businesses

    by Aditi Bansal

Updated on Thursday, April 27, 2017

Hard money loans provide a fast and lucrative way to finance your small business needs, particularly if you have a huge project and can’t qualify for the conventional bank loans. Take your time to shop around and compare rates from various financial providers to find a more convenient offer.

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Are you looking to fund your small business buts can’t meet the demanding requirements of banks? You don’t have to get funds from banks to fund business. You need to consider alternative mechanisms like hard money loans that are usually funded by private companies or individuals in exchange for collateral to secure the loan in case of default. The process of approval for hard money loans is quite simple, and you don’t have to go through the rigorous underwriting section as common with traditional banks. Private lenders can set their own rules and change as they deem fit. There are no established governing laws on such lending.

Credit Rating Doesn’t Count

The primary reason many small business owners fail to qualify for bank loans is the dismal or non-existing credit records. This is quite normal for startup companies trying to find ground in the competitive industry by delicately balancing their expenses and revenues. With hard money loans, the focus is based on the collateral as opposed to credit scores. 

Determine the Value of the Collateral

Any potential money lender will seek to establish the value of your collateral before commencing the loan processing. The value of the collateral must be equivalent to the loan you’re seeking. If the business assets don’t equal the loan amount, you may have to provide additional personal assets as collateral so as to qualify.

High Interest-Rates

Hard money loans always come with higher interest rates as compared to bank loans. This is as a result of the fewer regulations governing such loans. In other words, lenders charge higher rates to cover up for the high risks involved.

More Overhead Costs

Since hard money loans provide higher risks, the lenders try by all means to get their profits upfront. They will charge points on loan just like mortgage lenders do. The points are calculated as a percentage of the total amount borrowed. For instance, if your lender charges 5 points, you will have to pay 5% of the total loan amount upfront. Some may deduct the equivalent amount from your borrowing.

Defaults on Hard Money Loans

If you fail to repay your hard money loan, the lender always has a backup plan – to take possession of the collateral you provided. For instance, if you provided your building as collateral, the lender will foreclose the property and assume ownership in order to recover their money. Banks will similarly do the same if you default on mortgage loans or car loans.

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