Hard money loan for small businesses Credit Rating High Interest Rates

Are you looking to fund your small business but can’t meet the demanding requirements of banks?

last updated Wednesday, May 17, 2023
#Hard money loan for small businesses #Credit Rating

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John Burson

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

Credit Rating Doesn’t Count

Many small business owners fail to qualify for bank loans because of their dismal or non-existing credit records. This is normal for startup companies trying to find ground in the competitive industry by balancing their expenses and revenues delicately. With hard money loans, the focus is on the collateral instead of 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 to qualify.

High Interest-Rates

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

More Overhead Costs

Since hard money loans provide higher risks, lenders try by all means to get their profits upfront. They will charge points on loans 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 must 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 offered your building as collateral, the lender will foreclose the property and assume ownership to recover their money. Banks will similarly do the same if you default on mortgage or car loans.

 
 
 

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