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Why You Might Not Want to Use a Hard Money Loan

Many businesses need financing in order to purchase equipment or inventory, pay their employees on the offseason, and to gain new locations. However, most people are not prepared for the drawbacks that some alternative types of loans can provide. By looking at all aspects of a financing option, you can better understand the full impact a specific loan will have on your business.

What is a Hard Money Loan?

A hard money loan basically offers the same financing as a traditional bridge loan, except it is processed and funded by private lenders. Many investors use hard money loans to refurbish and sell real estate. These loans are typically for the short term and don’t require the same credit scores, lengthy processing time, or past history of repayment records. Instead, they base their approvals on collateral put up against the amount needed in a loan. In order to ensure that they are able to get their money back in case a business defaults on the loan, their loan-to-value (LTV) ratios are low (anywhere from 50% to 70%).

Drawbacks of a Hard Money Loan

Even though hard money loans can provide fast money to businesses, they aren’t meant for the long term. Businesses often find that high interest rates on this type of loan make it hard to get ahead and only allow a short period of time to pay the money back. If a business misses a payment or defaults on the loan entirely, they lose the asset they put up as collateral to that private lender.

Alternatives to a Hard Money Loan

There are many other commercial financing options out there to choose from other than hard money loans. Microloans, for one, are often used with startups that need relatively small loans (up to $50,000) and don’t have much credit history or can’t get approved for traditional loans. Those looking at hard money loans might find a great alternative in SBA microloans! However, if you really need an extremely similar loan to a hard money loan, consider going through a traditional bank for a bridge loan. Not only can they work with you for financing options for down the road, but they can often be flexible in your repayment terms if something arises.

While hard money loans might not be your best option, an experienced loan officer can advise you in the best course of action for your business. To schedule a consultation on loan options, give us a call today!

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