The Risks and Benefits Associated with Hard Money Loans
Hard money loans are a type of bridge financing designed to give you funding quickly. In about a week, you can be approved for a large amount of capital that lets you purchase real estate, buy expensive machinery or take care of emergency payments for your business.
Hard money loans rely on some type of collateral to reduce the risk for lenders. Collateral can be virtually any asset, from valuable jewelry and family heirlooms to company vehicles or real estate properties. Equipment financing may use the value of a piece of machinery as its own collateral.
Pros and Cons
What are the pros and cons of applying for a hard money loan? What should you look for?
1. Ideal for People or Businesses With Credit Problems
Because this type of financing focuses on the value of assets, your personal or business credit score is less important. If you’ve had debt problems in the past, this kind of loan is still an option that lets you grow your business while rebuilding your credit. Basically, as long as your assets are valuable and easy to sell, lenders are happy to approve your loan.
2. Easy Approval for Startups
Companies that have been in business for less than two years sometimes have difficulty securing traditional term loans. Banks want to see experience, reliable cash flow, and excellent profits. If your business doesn’t qualify at the moment for a long-term loan or SBA loan, hard money financing is a good alternative. You can get the money you need for new computer systems, advertising and hiring new employees.
3. Access to Emergency Funds
Even established businesses can go through rough patches due to market issues or slow seasons. Hard money loans can provide financing for emergency payments such as taxes, rent, inventory purchases, and payroll. Approval only takes about a week, so your business can stay up and running.
4. Security for Families With Debt
If you’re worried you can’t make a vital mortgage payment due to something unexpected, it may be worth using a valuable asset as collateral while you smooth things out. That way your house stays safe.
Things To Keep in Mind When Applying for Hard Money Loans
There are many benefits to hard money financing, but it’s not a one-size-fits-all type of investment. When deciding whether to apply, remember that a hard money loan is designed to be temporary:
- Higher interest rates than traditional loans
- Risk of losing the item used as collateral
- Terms of a few months or years
- Processing fees
The key is to find a lender that you can trust. They help you select a great fit that meets your immediate financing needs.