What is a Hard Money Lender?

You’ve seen an ad or a forum discussion and now you’re scratching your head wondering: “What is a hard money lender?” In short, it’s someone who lends based on the value of a hard asset, but there’s a bit more to it than that.

What is a hard money lender (HML)? Well, it could refer to one of two things. Some people use the term to describe organizations which fund loans with private money, such as brokerages or groups of investors, and others use the term to describe the individual people who are providing the funds. In either case, the financing is usually coming from one or more private individuals rather than a bank. Sometimes, the investors pool their money together to fund a deal and other times a single investor funds the whole loan on his or her own.

Whereas many lenders base their decisions upon the person borrowing funds, this form of lending is based upon the value of a hard asset. On a broad scope, it includes physical things like machines, inventory, gold, and real estate. It’s things that can be readily converted into cash or other resources. They’re different from soft assets which cannot be exchanged for cash easily. Stocks and bonds are a prime example here, but if you were referring to a business, it might be things which are valuable to the business, but aren’t reflected on balance sheets, such as brand recognition or intellectual capital.

This form of lending is seen more often in the real estate industry. The property, building, or land is the asset which is used to back the loan. It fills a gap that traditional lending leaves behind. For example, people who want to purchase a property to flip or rent out often can’t get approved by a bank at all.

What Are the Benefits of Working with Alternative Lending?

To understand the benefits, we have to break down, “What is a hard money lender?” a bit more. As noted earlier, they serve niches that the banks don’t. For example, if the bank won’t touch you because you plan to use the property for commercial purposes (non-owner-occupied), an HML will help. The same is true if you’re doing flips and the property is in such disrepair that it makes the bank too uneasy to loan. It’s also ideal for those who need to move quickly. It can take a month or more to close on a traditional loan, but an HML can have cash to you in days. Plus, credit doesn’t matter as much. You can still get approved by an HML with rotten credit, simply because your loan is backed by the value of the property.

Why don’t HMLs get more press?

Now that you can answer “What is a hard money lender?” you’re probably wondering why this is the first you’ve heard of the concept. The reality is, alternative lending doesn’t work for everyone. It’s not a universal solution. Those in the consumer market are usually served by banks unless they’ve got rotten credit. Plus, the individuals funding the deals don’t usually advertise their services. Instead, they work with brokers who find deals for them and oversee the process. That in mind, you’ll often hear terms related to HMLs more on real estate lending sites or within circles of investors and house flippers. If working with an HML appeals to you, you’ll want to find a broker who works with lots of private individuals who fund deals in your niche and will help you get the best terms.