Hard money loans are extensively used in real estate, but can be taken obtained by businesses in any other industry. The general perception is that hard money loans are a last resort—when all other lenders are out of the equation.
While it is true that hard money lenders do not look at the credit history of the borrower when approving a loan, this does not mean they are the last resort.
In fact, many investors consider hard money loans as the first choice of financing, because they come with flexible terms and quick approval time.
However, it is important to be smart when taking out a hard money loan. Here are some important considerations that borrowers should keep in mind:
Hard money lenders take keen interest in the exit strategy of the borrower. An exit strategy refers to the plan of the borrower to repay the loan.
Any borrower who is interested in taking out a hard money loan should have an effective and accurate exit strategy, but also realistic.
A hard money loan is like an investment for the lender, and they aren’t going to put their money in a project which doesn’t look very fruitful.
All hard money loans are secured with hard collateral, and lenders usually provide 60% to 70% of the total value of the asset.
Since hard money lenders do not look at the credit score of the borrower, hard collateral is the only thing that is keeping their money secure. So, it is important for all hard money borrowers to have adequate assets which can be kept as collateral.
Banks provide low interest rate because they have access to a lot of funds and provide very low interest on the current and savings accounts to their customers.
The same is not true for hard money lenders. In fact, most lenders are looking to earn more with their money than what they can earn by keeping their money in the bank. This is why all hard money loans have higher interest rate than a traditional or soft money loan.
Hard money borrowers should be prepared to pay a higher interest and should have adequate cash flow to meet the requirements of the increased interest expense.
Legitimacy of the lender
Scammers are found almost everywhere, and the world of commercial lending is no different. Investors are often tricked by fake hard money lenders who are looking to steal information or make some quick cash by asking the borrower to pay fraudulent fees before their loan can be approved.
It is important for the borrower to do complete research and go to a hard money lender that has a good history and track record. This will save the borrower from any scams and frauds.
We are one of the most renowned commercial lenders in USA, and specialize in hard money and bridge loans. Have a look at our website to learn more about us and about the services we offer.