When it comes to financing a small business, there are a number of lending options out there. One popular option is known as hard money loans. These loans provide you with the financing you need but you must have an asset to secure it. The hard money loans usually require a piece of real estate to secure the loan. Unlike personal loans and other lending options, the hard money loans almost always include a higher interest rate.
A hard money loan is usually offered by non-traditional lenders. This is because the business or person applying for the loan is in a poor credit situation and traditional lenders rarely work with them. Generally hard money loans are used on a piece of distressed property where you may be facing foreclosure or bankruptcy on the home.
Since you are applying for money, the lender will need to review your business credit and your personal credit. They will take a look at your debt to income ratio along with why you got yourself and your business into a distressed situation. This means they want to see your payment history and they want to see the financial records of the company and even your personal financial records.
Hard money loans are often granted by private investors that may see this as an opportunity to earn money on interest. Since they already know you are desperate to save your business, they usually won't check your business credit report and will instead look into the type of collateral you can offer to secure the loan. They need the security that comes with bailing out businesses that have gotten into a bad debt situation.
The amount of financing you will receive from hard money loans depends on the property you are fronting to secure the loan. If you have a nice piece of property to front, you will receive funding in the amount of 75% of the total value for that property. This is known as loan to value or LTV.
Hard money loans are done on distressed or quick sale properties. Banks that have foreclosed on the home often use these LTV loans in order to get as much money out of the property as they can. They may be taking a smaller amount than the home is worth by they are losing money the longer it sits on the market as the original buyer has forfeited their loan by declaring bankruptcy and are no longer legally responsible for the payments on the property.
Always work with multiple lenders when you are considering hard money loans as they are incredibly risky for both parties. Despite what you may think of the hard money loan option, it can backfire on you, causing you to lose the property you have fronted as collateral to secure the loan. It's a wise idea to consider alternative financial resources for your business so you can make the best decision possible to finance the needs of your organization.
Any time you are working with distressed properties and loans that have a high interest rate you need to know if the risks are worth the reward. Hire a good CPA to advise you on your business investments and to know if this truly is the best option available for the needs of your small business. Part of working with hard money loans also involves the property you are willing to put at risk to secure the loan. When you are dealing with these assets you need to figure out if they are really worth losing or if they can provide you with enough value to justify taking out a hard money loan.
Corporate Credit Concepts specializes in hard money loans. For more information about hard money loans and how it might benefit your business, please CLICK HERE for a free phone consultation.