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