If you’re a business owner, commercial real estate investor, or developer, there will probably come a time when you need a loan.
However, qualifying for a traditional bank loan isn’t easy. Often, for a variety of reasons, you’ll end up getting rejected by your local bank.
How can you get fast access to financing if a conventional bank has turned you down? First, consider getting a hard money loan.
What are "Hard Money" Loans?
“Hard money” is a type of short-term loan that typically has easier borrowing requirements than a bank. The application process is fast, and funding can often be approved in a matter of days. While hard money interest rates can be higher than traditional loans, the tradeoff is that you can get the funds you need, pay the loan back quickly, and then move into a more long-term financing solution.
How Do Hard Money Loans Work?
Hard money loans are asset-backed loans usually secured by real estate. With this type of loan, the lender’s primary consideration is the value of the asset pledged to secure the loan. Lenders may require personal financial statements or tax returns but are more focused on the asset’s value.
Some hard money lenders also lend against other assets such as equipment, precious metals, jewelry, etc. As a result, they often require an appraisal.
Banks generally do not offer hard money loans. Instead, hard money lenders are often private money lenders, wealthy investors, private equity funds, and other institutional lenders.
Why Use Hard Money Loans for Commercial Real Estate?
Real estate developers, investors, and business owners use hard money loans when their project or finances are not strong enough to qualify for funding through a traditional lender. Hard money loans are primarily used to buy raw land or an already developed property.
Here's a Hard Money Loan Scenario:
Maybe you have a business in the central Florida area, such as Tampa Bay or St. Petersburg. Suppose you need to buyout a business partner who also happens to own the building. Your partner wants to quit the business and “move on to other things” as soon as possible, so you’ll need money fast to buyout the partner and keep the business.
To get financing, you decide to go to your local bank. Now, you’ve kept all of your accounts with this bank for more than ten years. So it’s not like you’re some stranger. They know you well, and they know your business has prospered.
You meet with a loan officer, fill out the application and wait for a decision. You get more and more anxious as time passes, knowing that you need to get to the closing table.
Finally, the bank contacts you, and you find out that your conventional loan application was rejected. Did your loyalty and good track record pay off when you needed their help the most? No, it didn’t.
Now you are incredibly anxious because, without financing, the business that you’ve poured your heart and soul into would have to be sold right out from under you.
A hard money loan such as a bridge loan would allow you to buyout your partner and later get financed with a more traditional bankable loan. While you always need to do your due diligence to see what financing opportunities will work best for your situation, looking into alternative financing with hard money could be a viable solution if a bank turns you down.
At Manatee Mortgage Consultants, we help borrowers get cash quickly after a conventional bank has turned them down.
Advantages and Disadvantages to Consider
Hard money loans generally have shorter loan terms of 6-18 months. You may think your credit scores are a problem, and you won’t qualify. However, because they are asset-backed, the lender is less concerned about a minimum credit score, borrower qualifications, or financial conditions.
Unlike conventional banks, the approval process is usually faster, and hard money loans typically close faster than more traditional types of loans.
You need to know that the disadvantage of hard money loans is the costs, with interest rates in the double-digits and four or more points. The reason for the higher interest rates is because these lenders often take on more risk.
Calculate the Costs
Hard money loans are often the only solution for borrowers who have confidence in their project but cannot qualify for other loans.
To determine whether a hard money loan is a solution for your project, begin with getting a quote from a hard money lender. Then, calculate the costs of the hard money loan to determine whether your anticipated net profit, after costs, is sufficient to make your project worth the price.
Manatee Mortgage Consultants
Manatee Mortgage Consultants is unique because we guide you through the application process. We have robust lending resources and a wide range of solutions that are more flexible than traditional financing programs can offer.
If you found this information helpful, please share it with a friend. If you need a creative out-of-the-box funding option, give us a call at (727) 900-5967. We are standing by at your service.