Good Reasons to Use Hard Money Business Loans
Hard money business loans can offer much needed funding for expansion of a successful business. But it is not as wise to use a hard money loan to fund a struggling business.)
Hard money business loans are asset based loans that are provided to a borrowers based on the value of the collateral. Unlike traditional business loans, the decision to approve the loan is not based on the current financial condition of the company, its profitability or even the credit scores of the owners. The only real consideration is the value of the asset being used as collateral, which is in most cases real property. As a security measure the lender is normally only willing to loan the borrower up to 75% of the current value of the collateral. This insures that if the borrower defaults on the loan, the lender will be able to sell the collateral to recover his or her money.
If a business is not well established it can be very difficult to get a loan in the traditional manner. Banks want to see an established credit history for the business as well as a good credit score for the owners to demonstrate financial responsibility. In some cases even if the company has an established credit history, the personal financial situation of the owners is not strong enough to qualify for a conventional business loan. When traditional lenders are not an option businesses often turn to hard money lenders for a loan.
Hard money business loans represent a large risk to whatever collateral is being offered by the borrower. Businesses financial success can be more volatile than personal finances due to economic fluctuation. And if the business has a decrease in revenue it can be very difficult to turn that around in the short time frame of hard money business loans. The result is a default on the loan and the loss of the collateral. This could mean the loss of the property that the business is housed in or the loss of a personal property owned by one of the owners of the company. In either case the loss is devastating.
When to Use Hard Money Business Loans
If a business is relatively new and has not established a long credit history, then a hard money loan can be a good idea if it is to purchase materials to increase production or to expand or grow the company. But the company must be on solid financial ground for the loan to be a wise choice. If the loan funds are being used to bridge a lull in business or to cover operating expenses not being covered by revenue then the hard money loan is a very bad idea. The short term of the loan and the looming balloon payment are not going to allow for a complete turnaround of the business. And it is likely that not only will the business still fail but the collateral will also be lost.
Make a Smart Choice by Using a Hard Money Business Loans
If your business is struggling it can be tempting to use any means necessary to infuse cash to try to salvage the company. But a hard money loan is not going to do anything but prolong the inevitable. Using a hard money loan is only a good choice when you are growing a successful startup or expanding a self-sufficient business.
Why you might consider a Hard Money Business Loan
If you are having trouble qualifying for traditional financing, a hard money business loan can be a great alternative to a conventional bank loan. With this loan you borrow against assets owned by your business, allowing you to qualify even if you have poor credit.
When it comes to businesses that apply for this type financing the value of their commercial property acts as collateral for the loan. The value of this underlying property is a more critical factor for this type of lender than a borrowers credit score. Those with low credit but with a lot in the way of collateral may find an asset-based loan a good financing strategy.
However, a Business owner will need to consider whether the expense of a loan matches their need for financing. Any type of alternative loan will almost always be more expensive than a traditional business loan.
Before applying for a hard money business loan, consider
your need for financing and whether your need is proportional
to any assets you might pledge as collateral.
With asset-based loans consider whether your need for financing matches the risk of losing any property you might pledge to back the loan. With this type of business loan there is the potential that the lender could seize your business or other personal property should you default.
However also consider the main advantages of asset-based loans. Because credit is a non-factor, they are easier to qualify for, less documentation is needed and these loans can close within a matter of days. These advantages may outweigh risks depending on your circumstances.
Why should you consider a hard money business loan over other types of alternative financing?
The interest charged on a typical asset based loan is usually 10-15 percent. The higher interest rate on this type of loan is due to the risk assumed by the lender by forgoing the usual credit checks. However, asset-based loans are still less expensive than other types of alternative financing.
You may have considered other alternative financing options which could be far more expensive than an asset-based loan. One example of alternative financing are merchant cash advances, which are loans backed by a percentage of your businesses future sales. Cash advances can consistently eat away at revenue stream, and APR can reach into the triple digits.
Some methods of alternative financing may be less expensive, but could take much longer to close. For example, peer-to-peer platforms are one such type of alternative financing. While these loans may be less expensive than an asset based loan there is no guarantee that your loan will ever be fully funded. Asset based loans are less expensive than cash advances and are fully capitalized once your application is approved.
Always perform your due diligence to ensure any potential asset lender is trustworthy. Read online reviews of any potential lender to gauge the lender’s honesty and the experience of their borrowers.
Asset based loans can be cheaper and can close faster than other types of alternative loans, making them a great option are you struggling to qualify for traditional financing or if your business needs cash quickly.