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NGExpert financial copywriter
Page written by Chris Godfrey. Last reviewed on October 9, 2024. Next review due October 1, 2025.
Hard money business loans can be a fast and easy source of funding for US business owners if they have sufficient collateral. However, this type of financing is usually short-term, comes with high interest rates and fees and can be risky for the borrower.
A hard money business loan is a secured business loan that requires the borrower to provide collateral to the lender. Hard money loans are typically provided by private investors or lenders, and they focus more on the strength of the provided collateral rather than the borrower’s credit score and other standard loan criteria. This can make hard money loans a viable funding option for business borrowers who have good assets but poor credit.
Hard money loans are usually considered ‘high risk’, so you should expect to pay higher interest rates and fees than you may encounter with standard business loans. You should also be aware that your collateral may be seized and sold by the lender if you fall behind on your loan payments.
Hard money business loans are provided based on the value of your collateral. Lenders will usually seek physical assets as security – such as commercial real estate or land – although they may also consider ‘softer’ assets such as bonds, stocks and shares or even business inventory. The lender provides a loan based on a percentage of the market value of the collateral. This is called the ‘loan to value’ or LTV, and it will typically be 50% to 75% of market value. This gives the lender a margin in the event they have to seize the collateral and sell it quickly as a ‘distressed asset’ – usually by auction.
Value of collateral: $50,000
LTV: 60%
60% of $50,000 = $30,000
Loan offer: $30,000
Pros
Although hard money business loans are most often used in real estate transactions, the funds can also be deployed for other purposes – everything from working capital to M&A and expanding a production facility.
Hard money business loans rely more on the value of the provided collateral and less on the borrower’s credit history or business finances. This can make getting a hard money loan easier for business borrowers with less than stellar credit or patchy business income.
Hard money lenders usually have streamlined application processes and can often approve a loan and deliver funds to the borrower in only one or two business days. In contrast, standard business loans from banks and credit unions can take weeks to obtain and will typically require the borrower to provide significant documentation.
Cons
Because hard money loans rely more on the value of the provided collateral and less on the borrower’s financial situation or credit score, they carry greater risk for the borrower: It is much easier for the borrower to obtain a loan they cannot afford to repay.
Hard money lenders are often viewed as ‘the lender of last resort’, which means borrowers typically turn to these types of lenders when they cannot obtain funds via standard financing channels. Hard money lenders effectively charge a premium for this emergency service, asking higher interest rates and fees than you may pay with main street banks and credit unions.
Hard money business loans often have short repayment terms – anywhere from just a few months to one or two years. Combining short repayment terms with high interest rates can often make these types of loan unaffordable for many borrowers.
Hard money lenders will usually demand a down payment on the loan – typically 10% to 30% of the loan amount. If your credit score is weak, you may need to pay a higher down payment – although this means you will have lower repayment instalments and pay less interest overall.
Hard money loans are risky because they pay less attention to the borrower’s financial situation and place more focus on the value of the provided collateral. This can make it easier for a borrower to take on more debt than they can afford to repay.
The most important requirement to obtain a hard money business loan is having sufficient collateral to cover the value of the loan plus a margin on top. Lenders will usually provide a hard money loan based on 50% to 75% of the market value of your collateral. You should also expect to pay a down payment deposit of 10% to 30% of the value of the loan.
There is no minimum credit score needed to obtain a hard money loan, as lenders provide funds based on the value of your collateral, not your financial situation. Some lenders may check your credit score, but others may not. In short, if your collateral is solid, you can usually obtain a hard money business loan even with a poor credit score.
If a hard money business loan is not for you, there are other ways to fund your business or new venture. Online lenders will typically be the best option for these types of financing, although you may pay higher interest rates and fees than you would with traditional banks. Note that credit checks are standard with most commercial financing, but depending on the type of loan you choose, you may not need to provide collateral:
With term loans you receive a single, lump-sum cash injection and then pay it back in regular instalments over a fixed period of up to 25 years. Collateral may be required.
Withdraw as much as you want when you want from a loan facility up to the limit of your borrowing. You only pay interest on the sums you withdraw, not the whole credit line. Collateral may be required.
Invoice financing means borrowing against the value of your unpaid invoices. The lender usually provides up to 95% of the invoice value within a few days or even hours of the bill being raised. Your invoices act as security for the loan, no added collateral required.
Use your new equipment as you pay for it, while the lender maintains a lien on the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright. No added collateral required.
Merchant cash advance is for businesses that accept customer payments by credit and debit card. Borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Your sales act as security for the loan, no added collateral is required.
Revenue financing is similar to a merchant cash advance but with higher borrowing limits. Based on the size and regularity of their total revenues, (not just their credit card sales), businesses may receive a lump sum and pay it back over a short-term schedule, typically by small deductions from their daily sales. This type of loan can usually be secured quickly as qualification rules are less intensive and credit scores are not so critical. No added collateral is required.
Available up to $50,000, SBA microloans come with relaxed qualifying rules and can usually be secured with FICO scores as low as 500, or even with no credit score at all.
For a hard money loan or any type of business loan, working with business finance experts can make all the difference when applying for funding. Contact Swoop to discuss your borrowing needs, get help with your application and to compare high-quality business loans from a choice of lenders. Give your business the financial support it deserves. Register with Swoop today.
Written by
Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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