Running a business is both rewarding and challenging. Having the funds necessary to operate that business doesn’t always come from revenue. Sometimes business owners must turn to a loan in order to accomplish an important goal for the business like buying office space or getting one off the ground. When you’re just starting out or have lower credit, banks turn you down. But you still need money in order to run your business. A hard money loan is one way to get money without perfect credit.
What is a Hard Money Loan?
Hard money loans are typically used for real estate. They are loans that are different from traditional mortgage lenders. One advantage of a hard money loan is that it is faster to get than a traditional one. Traditional lenders look at credit reports and income as a way to approve a loan. These loans, by contrast, use property or collateral as a way to ensure repayment of the loan. If it is not paid, the collateral used to secure it is taken and sold.
They’re also used for business. Start-ups aren’t usually a good risk for a bank. So short-term loans are a better option. The lender in this situation often receives a percentage of future profits through something like credit card transactions.
How Long Do Hard Money Loans Last?
Traditional loans are paid on for many years. Loans like these ones are intended for short-term use only. The loan term lasts from anywhere from one to five years. The interest rates are higher for these types of loans as well so using them for a short-term purpose is a good solution.
Why Use a Hard Money Loan?
Hard money loans are faster in their approval process because a lender does not have to go through your credit and other personal financials as thoroughly because collateral is used to secure the loan. This does not mean that they want to take the property used as security. It just means that the other aspects of your finances are not as crucial as they are a traditional lender. Speed is especially advantageous once a relationship is established with a hard money lender. If you want to purchase a property that will sell quickly, a hard money lender often gets money to you quickly for the purchase.
These types of loans are often more flexible as well. In a traditional loan, lenders use the same approach to underwriting. Hard money lenders are often private so they are able to modify things like repayment schedules as they see fit instead of having to follow guidelines like those set for a large bank.
When it comes to approval, the amount of money extended depends on the specific situation. For purchases of new property, a hard money lender extends as much money as a property is worth. Owners who have an existing property receive money based on that property’s value. Loans are also used for the purposes of improving a property or starting a new business with very little sales history.
What to Know About a Hard Money Loan
They’re are not just considered short money loans because of their shorter loan terms compared to other lenders. Interest rates for this type of loan are between 7 and 12 percent. When the money is given out, a fee based on the loan amount is part of the fees owed. However, people who own multiple properties may require bad credit loans like a hard money one because it’s the only way they are able to get the money they need with more than one mortgage or an otherwise limited history like in a private business.
When to Use Short Term Loans
Since traditional loans take much longer to approve, bad credit loans are typically one of the few ways to get the larger amount of cash needed for real estate transactions like private or auction sales. Rehabs or improvements for properties that an investor keeps also require significant amounts of money and cash is often needed quickly.
Businesses also need larger amounts of money to pay for workspaces and other expenses. So this is a way to get the necessary funding without going through a long process or meeting a strict list of requirements
There are many lenders out there that offer a hard money loan to businesses. When seeking a lender, do your research and choose one that works for your particular situation. Look at reviews from people who have used the lender before or ask those who have been through the process before. Shorter term loans are not a traditional option but they are a solution for those who do not fit the traditional loan mold.