Real estate investing is one of the first things that comes to mind when someone mentions hard money. Yet hard money is not reserved solely for buying residential and commercial properties. Plenty of small businesses turn to it when they need financing. Hard money represents a way to secure the necessary funding without having to jump through bank hoops.
Given that hard money tends to come with higher interest rates, you might wonder why a small business would choose it over a bank loan. According to Actium Partners, one of the best hard money lenders in Salt Lake City, there are five primary reasons:
1. Funds Are Dispersed Faster
Make application for a bank loan and you might be looking at several weeks to several months before you actually get the money. That’s because banks have cumbersome application procedures. Borrowers find themselves submitting tons of paperwork, answering endless questions, and navigating a complicated process that takes a long time to complete.
Hard money loans can typically be made within days. Lenders offer much simpler application and approval processes that do not require borrowers to jump through hoops. Hard money lending is as simple and straightforward as it gets. As such, it is also fast.
2. Credit History is Not So Important
Hard money lenders are not as concerned about a borrower’s credit history compared to banks. Where banks will look over credit history with a fine-tooth comb, hard money lenders are more concerned about collateral than anything else. They are looking for collateral that is easily marketable and has a high enough value to cover the cost of the loan. That makes hard money easier to come by – even for sole proprietors with less-than-stellar credit.
3. Less Emphasis on Debt-to-Income Ratio
Hard money lenders are not as concerned about debt-to-income ratios either. Again, they measure risk primarily by the collateral borrowers offer. They certainly do not want to lend to borrowers whose income simply cannot support it, but they are willing to take a few more risks if the collateral being offered fits the bill.
Lenders are more friendly to risky loans if they stand a chance of making a good profit off collateral. The more money to be made, the higher the risk they are willing to take. Small businesses can take higher risks with hard money lenders because those lenders are willing to take higher risks too.
4. Refinancing Debt is Easier
Some small businesses turn to hard money as a way of refinancing existing debt. For example, you might have a small business with a bank loan coming due. The bank may not be willing to refinance, but a hard money lender will. Hard money makes it easier for the small business owner to restructure debt and keep things going without jeopardizing cash flow.
5. Hard Money is More Flexible
Anyone who has applied for a small business loan from a traditional bank knows just how inflexible banks are. Bank loans have to fit into neat little packages as determined by underwriters. Any scenario that doesn’t fit inside the package will not be eligible for a loan.
The general rule among hard money lenders is that they are more flexible. Because they are loaning their own money rather than customer deposits, they are free to do with it as they please. A typical hard money lender can structure a small business loan to meet the borrower’s unique circumstances.
Sometimes it is worth paying a bit more in interest to get a hard money loan. Small business owners do it all the time, so there must be something to it.