Hard money business loans for real estate definition & guide for small business owners

If you're a business owner or entrepreneur looking to buy and develop property, a hard money business loan could be the solution.

Hard money loans are short-term bridge loans that are ideal for borrowers with weak credit, entrepreneurs with no proven experience, and others who want to purchase real estate for business purposes. Find out if this type of loan is right for your financing needs and where to find the right hard money lender in our guide to hard money business loans.

What is a hard money business loan?

A hard money loan is a type of secured loan backed by real estate assets. Borrowers with the necessary collateral can obtain hard money loans even if they have a poor credit rating or little time in business. Often, hard money loans are considered a type of bridge loan.

Strange as it may sound, a hard money lender doesn't count on you being able to repay your loan, so your credit score probably doesn't matter as much. Your loan will be based primarily on the value of your collateral. If you can't repay your loan, the lender will repossess the property you used as collateral.

How hard money loans work

Hard money loans are similar to other high-interest short- or medium-term loans.

Most hard money loans for businesses have terms of less than one year, although longer loans can last up to five years. Generally, interest rates are somewhere between 9% and 21%.

There is no standardized underwriting process for hard money loans. The process can vary greatly from lender to lender.

Since each hard money loan is unique, the exact terms will depend on the deal you have with your hard money lender, the region you are buying in, and the loan-to-value (LTV) ratio. The higher the ratio, the more risk your lender assumes, which in turn usually means higher interest rates for you.

Additionally, you may incur closing fees and/or costs in the form of "points".

Points can relate to a variety of fees associated with a hard money loan. Generally, each point charged on your hard money loan is equal to 1% of the loan amount.

For example, if you have 100.000 and your hard money lender charges you four points, your fees will be 4.000 $. The points are paid up front and provide some return to the lender in the event you pay off your loan early.

Otherwise, a hard money loan is very similar to a traditional term loan. Your loan will accumulate interest over time. You make payments (usually monthly) until your loan is paid off. Ideally, you'll pay off your hard money loan early, before the high interest rates start to accrue. Since this is expected, there are rarely penalties for repaying your hard money loan early.

When you need a hard money loan

An easy way to think of a hard money loan is as an investor-to-investor loan.

In other words, you want to acquire a property quickly and get rid of it almost as quickly (or at least find a way to monetize it).

The archetypal hard money borrower is a person who sells houses, with the purchased property serving as collateral. This person does not plan to stay in the property long enough to go underwater on their loan. Ideally, they fix the property, increase its value and then sell it. Failing that, find a way to refinance the property before they either lose it or pay far more interest than the property is worth.

Renting out the property is another common strategy.

Advantages of hard money loans are:

  • Quick approval: Bypassing banks' byzantine approval processes usually saves you time. This can be especially useful in competitive real estate markets where you need to get ahead of other buyers.
  • Flexibility: if you are investing in real estate, a hard money lender might be more understanding of your fix-and-flip strategy than a bank would be.
  • Negotiable: Hard money lenders can, at least in theory, negotiate in ways that banks cannot.
  • Bad credit is not disqualifying: as long as you have a good plan, equity, and can demonstrate your real estate experience, bad credit is unlikely to exclude you from the hard money scene.

Why you should be wary of hard money loans

As is often the case with innovative, unregulated financial sectors, you should do your due diligence before getting involved in a deal.

Because there are not many regulatory systems in place, the hard money lending space is an ideal environment for predatory lending. It's best to have an attorney familiar with hard money contracts review your offer and make sure your interests are represented.

Disadvantages of a hard money loan include:

  • High interest rates: interest rates on hard money loans can easily climb into the high teens and sometimes even higher.
  • Loan fees: These would be comparable to the processing fee of a regular loan, but they are usually much higher, typically ranging from 2% to 10% of the loan amount.
  • Down payment: hard money loans typically cover no more than 75% of the cost of the property.

How to qualify for a hard money business loan

The amount a hard money lender can give you for a loan is based on the value of the property you secure it with. The more valuable the property, the more money you can get. This is the only and truly non-negotiable qualification for getting a hard money loan.

Still, there are other factors a hard money lender considers.

Many hard money lenders deal with a specific type of property (commercial, residential), so you need to find one that works with the type of property you want to secure.

You may need to prove that you have your own capital to invest in the property and have an actionable plan for repaying the loan. They will also consider your past experience with real estate transactions.

Your credit score may be considered as far as determining your interest, but it will rarely be a determining factor in whether or not you get the loan.

Where to get a hard money business loan

Hard money lenders are usually investment companies or private investors with an interest in the real estate industry. Because real estate is tied to a specific geographic area, hard money lenders, with a few exceptions (companies like Amza Capital or Lending One), tend to make loans locally or regionally.

Finding hard money lenders can be a challenge.

Since you deal in real estate, the hotter your local real estate market is, the more options you have in terms of hard money lenders. The flip side is that if your local real estate market is all but dead, hard money can be hard to come by.

Local real estate agents and associations may be able to point you in the direction of investors/hard money lenders in your community.

You should also look for online resources that can give you an idea of who is operating in your area. Be warned, however, that these resources will steer you toward the larger hard money lenders. If you're looking for a more personal arrangement, you may have to deal with your local real estate community.

A hard money lender is less interested in who you are as a borrower than in the potential value of the property you are buying. That means you should be prepared to demonstrate your credibility as a borrower.

Get the Right Financing For Your Real Estate Purchase

Hard money loans fill a very specific niche. If your business is involved in real estate development, has a poor credit rating and needs to act quickly, hard money business loans are a potentially fast and powerful tool.

Make sure you understand the terms and fees before you put your signature on anything. Before you sign, you should have a well-thought-out exit strategy. Mostly, you want to avoid riding out your hard money loan until the end of the term.

If hard money sounds too risky or you don't have much real estate experience, consider crowdfunding options for buying property.

Have bad credit, but hard money is too niche for your financing needs? Take a look at some other financing options for businesses with bad credit. Had a bankruptcy and need a more traditional loan? Find out if hard money loans are the answer if your business has filed for bankruptcy.

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