What Are Hard Money Loans?
When new small business owners start looking around for financing options, new terms for products that have no parallel in the personal finance world can be a little daunting. Hard money loans, for example, can be confusing if you think they are just one type of loan. In fact, they are a whole class of loans that can fit many of your company’s needs if you find the right program.
What Makes It a Hard Money Loan?
Banks have the ability to loan money they don’t actually have in the vault through programs that let them borrow on demand from the Federal government in the United States. By contrast, private lenders are working with investor money or the earnings from other loans, and since they are not traditional banks with that relationship to the government, they can only lend the money they have. It’s not a common thing, but you do occasionally hear bank loans referred to as soft money because there is no hard cash behind them.
Working Capital Loans and Credit Line Options
Many small businesses use hard money loans and private credit products like inventory-based credit lines or invoice financing when they need working capital because these programs are designed to be accessible and to provide fast approval determinations. There are a lot of options, and most private lenders offer more than one choice to make sure they fit the needs of businesses across many industries.
- Unsecured short-term cash loans
- Secured working capital loans or bridge loans
- Credit lines
- Asset-based financing options
If you are concerned about the cost of capital, then options that use your company’s property or assets are a better option than unsecured debt. If you want to control your financial risk exposure, though, unsecured loans and credit lines let you keep your assets out of the deal.
Hard Money Loans for Asset Purchases
There are also long-term loan options you can use to buy real estate or equipment for your company. These are often easier to access than bank loans because hard money lenders emphasize the cost of capital and the value of your collateral over the credit score you are currently carrying.
For most borrowers, that means a loan will be approved if the value is there in the property and your income can support the payments. Credit scores are used more to determine the cost of financing than to determine approval, with exceptions for credit reports with major issues.