Hard Money Business Loans: What Are They & Should You Get One?

If you’re a business owner with challenging credit who’s looking for quick funding, you might have heard about hard money business loans. A hard money loan is an alternative source of small business financing where the loan is secured by property. Because hard money business loans are made by individual investors or companies instead of banks, they are considered to be a riskier form of financing.

Before deciding to pursue hard money business loans, it’s important to know how they work and what alternative borrowing options you have.

What is a hard money business loan?

A hard money business loan is a type of secured business loan where property acts as collateral to finance the loan. Because hard money loans often have quick repayment schedules and can have higher interest rates, they are somewhat similar to short-term or bridge loans.

Because hard money loans focus on the value of the property and typically don’t take credit score or income into consideration, they may sound appealing to newer business owners or business owners with poor personal credit. However, the short repayment terms and high interest rates can make hard money business loans difficult to repay. If the borrower defaults on the loan, the hard money lender would be able to repossess the property.

How a hard money loan works

You’re more likely to come across a hard money loan through a private investor or another type of private lender who understands the real estate market and believes they can profit off of it. Typically, banks and traditional lenders don’t offer hard money loans.

Because hard money loans are made through private lenders, requirements are less transparent than requirements for business loans. Hard money loans usually offer shorter repayment periods and higher interest rates in order to make the loan less risky on their end.

This type of loan also tends to offer a lower loan-to-value ratio — this is the ratio of loan amount you borrow compared to the value of the asset used as collateral. The loan-to-value ratio also helps assess the risk for the lender. A commercial real estate loan from a traditional brick-and-mortar bank may offer a loan-to-value ratio of 80% to 90%, while a hard money loan may offer a loan-to-value ratio of 65%.

How to get a hard money loan

Because hard money lenders aren’t regulated in the same way banks are, hard money lenders face less regulatory scrutiny. Unlike a bank, which makes lending decisions based on a variety of factors — such as income, annual revenue or credit history — hard money lenders place more emphasis on the value of the property serving as collateral when making a loan. As such, the major factor to qualify for hard money loans is having real estate to put up as security for the loan, but that also means they come with much greater risk.

Hard money loans pros and cons

Like all types of lending products, hard money business loans have both advantages and disadvantages associated with them.

Pros

  Easy to qualify and apply: While you’ll have to fill out an application, you won’t have to jump through as many hoops regarding documentation of income or credit to qualify for a hard money loan. The value of the property matters more than your personal or business finances.

  Fast access to funds: Generally, you can get funding from hard money loans faster than you can with a mortgage loan, as private hard money lenders aren’t required to adhere to the same mandatory waiting periods required by federal law that mortgage lenders do. You may be funded in just a few days.

  Approval based on collateral, not credit: Hard money loans put more weight on the value of your collateral than your credit history, making them possible to obtain even if you have poor or thin credit. Hard money lenders take the value of the property into consideration because if the borrower defaults on the loan, they will repossess the property.

Cons

  Higher risk and interest rates: Because hard money lenders don’t base their lending decisions on how reliable a borrower seems to be, they take on a decent amount of risk that the borrower may default on their loan. To offset this risk, the borrower often has to pay higher interest rates to make up for the fact that their credit history and income may not have been taken into consideration.

  Lower loan-to-value ratio: Hard money loans tend to come with a lower loan-to-value ratio, which is the ratio of the amount you borrow to the value of the asset put up for collateral. A lower loan-to-value ratio means you’ll be loaned less money for the value of the property than you might with traditional lenders.

  Shorter repayment plans: Alongside high interest rates, hard money loans also often come with short repayment terms. These terms can be challenging to meet if it takes a while for your business to start generating income.

  You may need a large down payment. To offset their risk, private hard money lenders may require a higher down payment. In some cases, you may need to provide a down payment of 30% or more.

Alternatives to hard money loans

Before you decide to pursue a hard money loan, you may want to consider several other small business loan options. Except for unsecured loans, all of the options listed below are types of secured loans which can be less risky for the lender.

Equipment financing

If you need help financing the cost of purchasing equipment, consider equipment financing. Because the equipment acts as collateral for the loan, it can be easier to qualify for this type of financing if you don’t have a high credit score — but again, you won’t risk losing your purchase if you default on the loan.

Invoice financing

Similar to equipment financing, you can use invoice financing to avoid using a hard money business loan. Invoice financing allows you to use unpaid invoices as collateral in exchange for a line of credit. You’ll need a steady stream of invoices coming in to qualify for this type of credit product, and you could run into hefty fees — though you may end up paying less than you would with a hard money loan.

Term loans

If you need to purchase something other than equipment or don’t have invoices to finance, secured term loans could be an alternative to hard money business loans. Secured term loans can be used for a wider range of purchases, such as real estate, equipment or payroll. Collateral is required to secure a term loan, but that may also make it possible to get a business loan with bad credit. If you’re worried your credit would be a limiting factor with banks, consider starting with banks or lenders you already have an existing relationship with that know you have a history of making on-time payments.

Unsecured loans

Not all loans require collateral to secure them. Because unsecured loans aren’t backed by the security of assets as collateral, they may come with higher interest rates. These loans are available from traditional banking institutions, but if you’re struggling to qualify for an unsecured loan, you may find online lenders with more lenient credit and lending requirements (however, these may also come with higher rates and more fees).

FAQs about hard money loans

Is a hard money loan a good idea?

A hard money loan can come with a high interest rate, but can also provide you with cash quickly even if you don’t have a high credit score. If you can pay back your loan on time, it’s up to you to decide if those high interest rates are worth it.

Are there unsecured hard money loans? 

No, hard money loans are secured by property to help lower the lender’s risk.

Do hard money loans require a down payment? 

Yes, hard money loans generally require a large down payment of 30% or more.