Hard money loans. When you hear the term, you may think of a particularly notorious type loan sharking. This is because some time ago, predatory real estate lenders with an interest in “lending to own” started making very risky deals with borrowers. These untoward financiers were lending to people with bad credit histories, and people they knew could not repay their loans. The idea was that they actually planned for their borrowers to default on their loans so that they could foreclose on the property. They used their positions as trusted professionals to assure people they could afford the loans they were being given- even when they clearly could not. These loans were the primary cause of the real estate housing “bubble” that broke dramatically in 2008, causing the recession.
What is a Hard Money Loan?
A hard money loan is usually extended to borrowers looking to invest in real estate, but they can include other types of business loans backed by banks as well. These loans are more often than not provided by private investors and are usually extended as a “bridge” between the financing of construction costs and the acquisition of a long-term loan.
You should keep in mind that those who provide these types of loans are not controlled by the Office of Thrift Supervision, the Federal Reserve, or other regulating bodies. What this means for you is that the application process can vary widely, and stand in sharp contrast to the applications process provided by more traditional lenders.
Fortunately, the abusive loaning methods associated with this type of lending have become a thing of the past for the most part. Although, much of the stigma remains, some savvy investors have realized the value of a hard money loan. When it comes to using a hard money loan to finance your business capital needs, you may need to work harder to convince a lender to work with you. You might have more work to do than you would if you were planning to use it to buy property. This is because buying property is usually what hard money loans are for. If you’re planning to use this loan to buy property with which to operate a business, you may be at an advantage.
Here, we will discuss some of the pros and cons of hard money loans and how you can make them work to your advantage.
Obtaining Hard Money Business Loans
Find a Trustworthy Hard Money Business Loan Lender
If you’ve been rejected by a more traditional lender, it might be tempting to go with the first hard money lender you encounter. But before jumping in feet first, do some basic research and make sure that you choose the right one.
Research Local Hard Money Business Loan Lenders
Perform a local Google search for hard money lenders in your area and then ask yourself the following questions about each one you encounter. Does the lender have a legitimate looking website? Is the lender only trying to sell loan seeker’s information to third party marketers? Are they in good standing with investors? Are they facing lawsuits? What kinds of projects have they been involved in? Are these projects similar in nature to yours? Does this lender offer a liaison you can meet with?
Consider the Risks and Benefits
Hard money loans are meant to work as short-term investments twelve months in length or shorter. Can you repay the loan in the frame of time? These loans also come with higher rates of interest ranging between 12 and 20%. You can also expect extra fees. What’s more, if you’re going to a hard money lender because you were turned down for a traditional loan- the terms of a hard money loan may not meet the capital requirements of your project.
How to Apply for a Hard Money Business Loan
If you have thoroughly examined the lender you wish to work with and find them acceptable, you can go forward with the process. Now that you’re convinced they are right for you, you will have to prove that you are right for them.
Discuss the Value of the Property You Want to Buy
First you will need to demonstrate that your project will result in returns, making it worth their time to invest in you.
Present a Financial Plan to Your the Lender
As in most cases where an entrepreneur is looking to start a business and needs investors, there is a vetting process. You will have to prove to your lender that your business plan is viable and that it will do what you expect it to do. When financing a home, most lenders will want 30 to 40% of additional costs in hand. This is not usually the case with sizable commercial projects.
While the majority of hard money lenders will want to verify the value of the property you wish to purchase first and foremost, you may also need to demonstrate your own financial information. They may want to know your income, your credit score, and your current holdings. Be prepared to show W-2 forms bank statements, pay stubs, and other such documents.
Protect Yourself from Legal Implications
Before signing along the dotted lines, be sure to review all of the terms of the agreement. Check for yet undisclosed fees. These are an important warning sign. Ask them if all fees are included in the loan agreement. It wouldn’t hurt to consult a lawyer before making things final.
What to Do After Accepting the Hard Money Business Loan
Act On Your Investment Quickly
Hard money loans are often granted to obtain property that isn’t expected to be on the market long. That means you need to move on your purchase quickly.
Be Ready to Cover Underwriting Fees or Closing Costs
Often times, these types of loans require the borrower to pay additional underwriting fees to move the process forward.
Obtain Property Insurance
Most of these types of lenders will expect the borrower to obtain property insurance. You should go for a policy that is bundled in with the loan if this is available. Bundled deals have the best chance of offering the most applicable types of insurance.
Repaying Your Hard Money Business Loan
Hard money loans are not long-term arrangements, and they are expected to be paid back relatively quickly. That means your lender may make an unfavorable report to the credit bureaus sooner (if you default) than you might expect them to if you’re accustomed to ordinary loans. You should consult a business financing expert before accepting any kind of business credit such as loans, vendor credit, or credit cards. If you need capital for your venture, a business credit expert can guide you in your efforts to obtain capital, and build up your credit score.
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