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Hard Money Business Loans: How to Get Approved

Hard money business loans, also known as bridge loans, are a type of unsecured business loan used to finance a project or start a business. Traditional banks don’t typically have hard money lending options. Rather, funding partners, private individuals, or lending groups provide these business loans to entrepreneurs in need. Since hard money loans don’t take the borrower’s credit history into account, they can be more accessible for some. However, obtaining a hard money loan does require a significant piece of collateral, often real estate, to secure the loan. House flippers or other real estate investors most frequently use this type of small business loan.

Pros and Cons of Hard Money Loans

One of the most significant benefits of a hard money loan is that it gives entrepreneurs access to the cash they need regardless of their credit score or existing business history. Working with a funding partner, loan applications can be processed and funded in a matter of days, which is much speedier than traditional bank loans.

On the other hand, hard business money loans are very expensive. They often have double-digit interest rates and sizable origination fees. As short term business loans, they usually need to be paid back within a year. That time frame does not allow a lot of wiggle room for unexpected challenges or setbacks. And, since an asset (usually property) is used as collateral, if you default on the loan you will lose your valuable asset.

How to Get Hard Money Business Loans

The first step to landing a hard money loan is to create a plan. Know exactly how much money you need to finance your project. In a document to present to potential funding partners, outline your idea and include a proposal on how you’re going to increase the value of your investment. Make their upside very clear and attractive. Also, gather relevant financial paperwork like recent tax returns and balance statements. Have all necessary documentation compiled neatly into a folder or binder to present when meeting with potential funding partners.

Next, find a funding partner. You can look online or ask local real estate agents or investors for referrals. Do your research and ask for references to be sure the funding partner is legit and not a loan shark looking to take advantage of you. If you are not comfortable with the loan terms presented, keep on shopping. Once you find a loan with terms you are amenable to, consult your lawyer and your accountant to be sure the contract is fair and reasonable.

When you’ve secured your loan, start working on your project immediately. You don’t have a lot of time to sit on the money, as hard money loans generally have short terms. It might also be a good idea to seek out insurance on your project to cover any unexpected occurrences that could put you behind schedule. Hard money business loans don’t typically involve a monthly payment schedule, but they are paid in full with one large payment, including interest, at the end of the term. As such, make sure you are putting money aside so that you can pay back the total loan amount when the due date arrives.

While hard money loans certainly aren’t for everyone, they can be a good option for businesses that need help to get off the ground, especially if a real estate investment is involved.
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