| Before we go any further, let's make sure we're | | | | security in the overall security package for the loan. |
| working from the same definition of hard money | | | | Con - If you fall behind with your payments, the |
| business loans. | | | | foreclosure process can be swift and will typically be |
| For the purposes of this discussion, hard money | | | | as fast as the local jurisdiction will allow. |
| business loans and hard money loans in general, are | | | | The basic scenario for considering a hard money |
| typically secured by real estate. | | | | business loan is when a business has exhausted its |
| Because the lender is not usually concerned with the | | | | conventional financing sources and is still short money |
| application of the funds acquired, I'm further defining a | | | | to operate, expand, or just take advantage of short |
| hard money business loan as a source of funds | | | | term opportunities. |
| invested into a business operation. | | | | Because repayment is usually required within a one to |
| The lending criteria for issuing a hard money loan is | | | | three year period, hard money business loans can also |
| primarily focused on the equity held in real estate. | | | | be categorized as bridge loans. |
| Typical characteristics: 1) private lending sources, 2) | | | | If you're thinking about whether or not to secure a hard |
| short interest terms from one to three years, 3) up | | | | money business loan, consider the following points: |
| front fees on closing, 4) short in duration, 5) use of | | | | >>> Can you generate an ROI? If you have good, |
| funds not a focus, 6) limited number of debt covenants | | | | profitable business in front of you that you can't bank |
| if any, 7) interest only payments is quite common, 8) | | | | because a lack of short term capital, then a hard |
| failure to pay results in sale assets to retire the debt. | | | | money business loan may be a solid option. |
| While hard money lenders have their detractors, they | | | | >>> Do you have an exit strategy? Remember that a |
| serve a very real and valuable purpose in the | | | | hard money business loan is effectively a bridge loan |
| commercial financing market place. | | | | that you're going to have to pay back in the near |
| Pros and Cons | | | | future. |
| Pro - The application process for a hard money loan | | | | If you can't create a cash flow scenario where full |
| tends to be considerably faster than a comparably | | | | repayment is possible at the end of the loan term, then |
| sized conventional loan application. | | | | a hard money business loan may not be a viable |
| Con - Compared to conventional real estate financing | | | | option. |
| through institutional lenders, the cost of hard money | | | | >>> What are your alternatives? If your alternative |
| loans is almost always higher. | | | | financing options are equity based where you are |
| Pro - In many cases hard money can be lower cost | | | | giving up a portion of the future profits of the business, |
| than cash flow financing facilities like subordinate debt | | | | a hard money business loan can allow you to retain |
| and factoring. | | | | control of the business and keep the related profits. |
| Con - Up front fees also add to the cost of hard | | | | >>> What's the impact on personal liability? If your |
| money business loans which can significantly increase | | | | alternative business financing options are high cost and |
| the effective interest rate you're actually paying over a | | | | still require a personal guarantee, then a hard money |
| period of time. | | | | business loan may actually be a better option. |
| Pro - As a bridge loan, these funds are normally | | | | >>> Can you generate enough capital? If a hard |
| outstanding for a short period of time so the shorter | | | | money business loan cannot completely address your |
| the use, the lower the potential cost. | | | | financing need, then it may not be a good fit. |
| Con - At the end of the interest term, if an extension is | | | | Sometimes business owners will use hard money to |
| required, but not granted, the loan needs to be paid out | | | | buy time until they can acquire additional capital to |
| in full. | | | | meet their entire financing need. |
| Pro - From a cash flow point of view, an interest only | | | | The problem with this strategy is that hard money is |
| payment, even at a high rate, can still be less strain on | | | | not very patient, and if it takes longer to acquire the |
| the cash flow. | | | | additional funds than your cash flow allows, the hard |
| Con - Once you sign up for an interest term, its the | | | | money lender will not likely postpone or restructure |
| same as most fixed interest rate terms whereby | | | | your debt serving costs. |
| there is usually a 3 month penalty for early payout. | | | | Instead, if you fall behind in your payments, they will |
| Pro - Hard money can also be extended against non | | | | likely realize on their security, which may put you out of |
| real estate assets where real estate is still the primary | | | | business. |