A Fundamental Guide to Hard Money Lending

Two people sitting at a table and discussing loans while looking over paperwork. Their faces are out of frame.

In a tight lending environment, banks may raise their standards and restrict lending to reduce risk. This can place entrepreneurs, investors, and business owners in a difficult position. 

Cash flow and unexpected expenses are some of the biggest challenges for growing businesses. Real estate investors facing a competitive property market need to act on potential investments without delay. When the time to fund and qualifications to finance are unreasonable through conventional lenders, hard money loans offer fast, flexible financing with competitive terms to commercial borrowers. 

What Is Hard Money Lending?

Hard money lending is a type of financing that uses real estate to secure loans for business purposes. The primary uses for these types of loans are:

  • To facilitate the purchase or refinance of all types of real estate.  
  • To act as bridge loans. In this capacity, the real estate collateral is effectively converted into cash for use in any legal business purpose, whether debt refinancing, working capital, or so on.  

How Hard Money Lending Differs from Traditional Bank Loans

The application process for a traditional bank loan can be drawn out with long delays between approval and funding. Standards for financing terms and risk profiles can also make loans inaccessible to borrowers based on strict credit score thresholds. By comparison, hard money lending offers:  Flexible Financing Terms

Hard money loans are secured with real estate, allowing lenders to prioritize the value of collateral over more traditional criteria (although those criteria are still considered). This supports creative financing with more flexible repayment schedules, interest rates, and eligibility requirements for borrowers.

Asset-Based Risk Profiles 

Underwriting for hard money loans is asset-based, with the value of collateral (real estate) enhancing the overall risk profile of the loan. Credit scores and business finances are secondary considerations but won’t restrict borrowers from financing. 

Streamlined Application Processes

Applications are often much simpler, faster to complete, and faster to close with hard money lenders. This is because they are funded privately and not by federally insured banking institutions. 

Short-Term Loans

Financing a hard money loan will have a much shorter repayment schedule than a traditional 20- or 30-year mortgage. Depending on the business purpose, a brief funding period consistent with a quick turnaround can be beneficial, especially for investment properties. Interest rates will vary with each lender, but may be higher than conventional real estate financing.

Advantages of Hard Money Loans 

Businesses and real estate investors aren’t always in a position to wait for lengthy closing times or fit their financial standing to a conventional model. Hard money loans offer multiple advantages that make financing less challenging:

Fast Access to Capital

Applications are processed and closed without delay so you can fund your business interests in real time. This is essential to secure investment properties in a competitive market and keep business operations running without disruption when anticipated expenses come up. 

Simple Qualification 

Although hard money lenders will review your credit score and business finances, their focus is on the real property positioned as collateral. This allows new borrowers and businesses with lackluster credit to qualify for loans when they would otherwise be turned away by a bank.  

Broad Potential for Use

Unlike traditional small business loans, hard money loans can be used for many short-term business purposes and aren’t restricted by requirements of how proceeds may be spent. 

Understanding Loan-to-Value Ratios

Loan-to-value (LTV) ratios represent the size of a loan in relation to the value of collateral. Lenders use LTV ratios to determine how much funding you’re eligible to receive with asset-based financing. 

LTV ratios are also used to assess the risk profile of a loan, so each lender will have their own standards. Although a conventional mortgage may have as much as a 90 percent LTV ratio, hard money loans will range between 50-75 percent. When applying for a loan, you can calculate the LTV by dividing the loan amount by the value of the property leveraged.  

Partner with Val-Chris Investments for Unmatched Expertise

Whatever your financial goals may be, our team at Val-Chris has nearly 50 years of specialty private lending experience. If you’re considering a hard money loan, we understand the circumstances are time-sensitive and unique to your business. 

Contact us today to talk about financing that works for you. 

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