Advantages of Hard Money Commercial Loans

Hard money commercial loans are a special branch of the lending industry that target business borrowers with short-term financing needs - often in large amounts - to complete the purchase of land or buildings which typically they expect to sell quickly. Often, hard money commercial loans are the only financing available for such deals, but they have specific advantages that make them effective as well.

Available Funds When None Are Available

Traditional business lenders, such as banks and credit unions, do not deal in hard money commercial loans. These loans originated in the United States and Canada in the 1950s when rapid economic expansion led to extensive commercial development. Often, an investor would need to buy a piece of property for quick sale but did not have the collateral or cash flow to qualify for a conventional business loan. Private venture firms filled the need for financing. Hard money commercial loans always have higher-than-market interest rates, but for many business borrowers, they offer financing when no one else will offer it. 

Asset-Backed Collateral

One of the reasons traditional lenders, like banks, don’t do hard money commercial loans turns out to be another advantage. Hard money commercial loans are asset-backed. That means the asset being purchased with the loaned funds is the only collateral. Very often, the property being purchased is a long way away from producing income. As an example, an investor wants to buy a piece of land believing it can be sold to a commercial developer in six months. During that period, there is no possibility of income from the land, there are tax costs and the developer might back out. All of this increases the risk of lending on the land. 

The cost of lending is always based on risk. Because of the higher risk the interest rate will be higher. Also, the loan to value ration will be between 60 to 70 percent, which is low. Despite those drawbacks, hard money commercial loans are among the only type of financing available for asset-backed collateral when the asset is non-revenue-producing.

Flexible Lenders

Private venture capitalists have a great deal of flexibility in determining to whom they will offer hard money commercial loans. Unlike a bank, which has fiduciary responsibility to shareholders, private venture capitalists can assume greater risk in hopes of greater return. If a purchase and resale deal looks very likely to happen, but the borrower does not have sufficient collateral or cash flow to justify the loan, a bank could not consider a traditional loan. In that instance, private funds for a hard money commercial loan opens a closed door.

Nimble Lenders

Lenders like predictability and simplicity. That is why they can quickly get you approved for a car loan if your credit score is good; a home loan if you’ve good credit and good equity; and a business loan if you have a great balance sheet. Hard money commercial loans are neither predictable nor simple. Still, hard money lenders can turn your request around quickly, and often they can get your loan funded in two weeks or less. Again, they can do this because they are charging higher-than-market interest rates which offset their risk. Plus, they understand asset-backed lending.

Flexible Terms

While hard money commercial loans typically are short-term loans, or “bridge” loans, these lenders are flexible as to the terms. Business borrowers can get hard money commercial loans for up to three years for the right projects. Plus, repayment terms are open and negotiable. A back-ended balloon payment is typical, when the borrower pays off the majority of the loan upon the sale of the asset that backs it.