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