hard money loan

What is a hard money loan in Business

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Hard money loans are a growing form of private lender financing in the world today and having an understanding of it can pave the way for you in the business world.

Every business needs capital to survive. Maintaining a sufficient cash flow is essential to maintaining operations, while new acquisitions and developments are needed to increase liquid capital in market demand.

Businesses frequently turn to lenders for support, but what happens if traditional lenders refuse your loan application or take too long to meet their needs? Hard-money loans may be an option in those situations.

Private borrowers are usually considered more versatile than traditional borrowers, and are also able to deal with lower credit ratings or reduced cash reserves.

Private lenders also have the ability to grant loans quicker, helping the company get the funding it needs more quickly.

Nonetheless, there are also considerable risks associated with hard money loans, so it’s important to consider the pros and cons before a private lender takes any money.

What does the hard money loan mean?

 

A hard money loan is a form of lending that is being provided by the borrower based on the value of certain collateral, usually real estate.

A private lender can bid a loan as a percentage of the assessed value of the asset.

“What [a hard money loan] does is allow a company or person to turn a real estate asset into cash which they can use for whatever legitimate business reason they want,” said Jon Hornik, chairman of the Private Lender Group.

“It’s the way a hard asset can be turned into cash.” A big benefit of hard money loans is that they don’t allow traditional borrowers to use the same underwriting requirements.

While evaluating a loan application, traditional lenders, including banks, look at borrower credit score, debt-to-income ratio, revenue and more.

While private lenders often look at these elements, collateral value is the dominant factor for hard-money loans.

How does hard money loan work?

 

Hard money loans are short-term, collateral-backed loans, usually some form of immovable property.

In a financial institution they are financed by private investors rather than by depositors. The fact that the money is borrowed privately gives borrowers more leeway when it comes to deciding which loans to accept and which to refuse.

While applying for a hard money loan, it’s crucial to remember that each private lender may have special underwriting criteria of their own.

Two private lenders may treat a loan application in very different ways; however, a hard money loan usually always returns to the collateral asset’s value.

The borrower asks for a proportion of the collateral asset value as a loan, which is known as the debt-to-value ratio.

Conventional lenders must comply with stringent requirements for the underwriting.

A bad credit score or low debt-to-income ratio will prevent businesses from having a loan.

Banks usually often limit the amount of loans they offer to a single person or business entity. When you already have several traditional loans, hard money loans may be a way to obtain further financing.

“If you have less-than-steel loans, then hard-money loans are better because the underwriting is focused on the asset, not your credit history,” said Breyer Home Buyers owner Shawn Breyer.

“Banks [also] restrict the number of traditional loans a individual can have at a time. Generally speaking, borrowers owe points (or 1 per cent of each loan value) due at the closing of the loan, as well as the principal and its interest.

It can get very costly, depending on the terms of the loan.

Advantages and Disadvantages of Hard money loan?

 

A hard money loan can easily and without the strict underwriting conditions imposed by traditional lenders offer a business much-needed cash.

This means that companies, including those with poor credit ratings, will usually get the cash they need quicker and faster than when they’re applying to a traditional lender.

“The cash flow to businesses is like oxygen,” Hornik said. “Without cash flow, you go down pretty fast. In some situations, the funding given by private lenders is crucial to the survival of companies.

” Hard-money loans, however, grow quickly and carry high interest rates, making them very costly if not immediately paid back.

“The terms and conditions associated with hard money loans typically include high interest rates above 10 percent, high closing costs at several exceptions, a draw-down timetable for completing different construction stages, and also a pre-payment penalty if the loan is to be paid early,” said David Reischer, Legal Advice.com’s real estate attorney and CEO.

These terms render especially costly, and probably restrictive, hard money loans. Since hard money loans are often used for short-term building or renovation projects, the lender has a vested interest in the property’s “as-improved” value.

Which means they could pressure you for any projects to meet strict deadlines.

In fact, if you default on a hard-money loan, the lender has the right to foreclose your collateral property and sell it to fund your mortgage, even though you have already done substantial work on the land.

It’s important that you have a plan to repay a hard money loan and then flawlessly implement the plan, Hornik has said. One warning is… hard money loans have a one-year or two-year duration.

Several times, lenders apply for a loan, close a loan, and don’t know that the day after they close is when they will focus on how to pay the loan.

There is no wasting time. The cost of a hard cash loan over a period of three or four years will eat you up

When does a firm consider loaning hard money?

 

Since a hard money loan could end up costing you too much if within the short maturity period you can not repay it, why should you take one?

There are many explanations why companies take on hard money loans every day and many are able to pay them back quickly without incident.

Usually, hard money loans and private lenders represent companies that fall into at least one of these categories:

 

1. Can’t get a conventional loan

 

Conventional lenders must comply with stringent requirements for the underwriting.

A bad credit score or low debt-to-income ratio will prevent businesses from having a loan. Banks usually often limit the amount of loans they offer to a single person or business entity.

When you already have several traditional loans, hard money loans may be a way to obtain further financing.

“If you have less-than-steel loans, then hard-money loans are better because the underwriting is focused on the asset, not your credit history,” said Breyer Home Buyers owner Shawn Breyer.

“Banks [also] restrict the number of traditional loans a individual can have at a time. Private lenders who offer hard-money loans have more freedom to accept as the capital comes from private investors. Businesses that cannot secure a traditional loan also times pursue private lenders.

 

2. Need funding urgently

 

A lot of businesses that are willing to secure a traditional loan are still going to private lenders because their approval procedures are much quicker.

“Much of the time with a hard-money lender, you’re referring to a guy who is a decision-maker for a group of people who are, because he’s not writing the check himself,” Cole said.

“It cuts right down to the chase.” Approval process for the traditional conventional lender can take several months. Sometimes, private lenders grant financing within a couple of days.

 

3. Need a short term loan

 

Hard money loans are useful for renovation and reconstruction projects as well as for the purchase of real estate.

For these reasons, a short-term hard money loan helps you to use the property as collateral, and easily clear the debt from your accounts.

Hard-money loans are more suitable for companies who want a short-term or small-dollar loan than traditional lenders.

 

Advice for companies accepting a hard money loan

 

Never accept any loan, particularly a hard money loan, without first trying to do your due diligence.

Failure to repay would have steep consequences, particularly if your property is on track.

Defaulting on a hard money loan exposes you to default, so establish and stick to a strategy. Here’s a few expert tips about taking a hard money loan:

 

1. Avoid fees for prepayment.

 

Stiff penalties for prepayment practically negate the concept of a short-term loan.

Ensure sure that the loan agreement is checked for any deferred interest clauses.

If the fines are unfair, stay away. Better still, consider a hard money loan that doesn’t levy a penalty for prepayment at all.

The most important thing to look for in a hard-money loan is that there is an excessive and serious penalty for prepayment.

A hard money loan has the purpose of serving as short-term financing.

As such, if the loan to be paid off early is a serious prepayment penalty, then it’s typically an effort by a hard money lender to lock a borrower into a high interest rate for a long period of time or otherwise incur a punitive penalty.

 

2. Understand the Loan terminologies.

 

You should be specific about the main elements of the loan, including the interest rate, the points (a fee of 1 percent of the loan value per point) the lender pays on the loan, and when you should make those payments (up front or upside).

Must be especially transparent on the credit repayment plan to prevent defaulting.

 

3. Project forwards.

 

The easiest way to make a hard cash loan work for you is to decide first how and when to repay it.

Base the proposal in terms of the terms and conditions of the loan contract.

Make sure that you have several ways of handling the loan in the event that unexpected events impact one of your strategies.

Have prepared several exit plans before the project begins, said Silverbridge Realty property manager Cassie Villela.

For example, if a flipped home doesn’t sell by a certain date, it can be rented out and then refinanced into a traditional loan.

Komolafe Timileyin is a passionate entrepreneur that loves to solve entrepreneurial issues. He is also a blogger and an upcoming Engineer.

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