Hard Money Lender

When and How to Use a Hard Money Loan

When traditional financing and bridge loan financing through a private lender isn’t possible, a hard money lender may provide the funding you need. Before signing on the dotted line, carefully consider whether or not the deal on the table is in the best interests of you and your business.

Higher Rates, Higher Risk

Even the best hard money loan candidates can find they won’t be able to obtain low interest rates. That is because hard money lenders accept a higher degree of risk of default in exchange for earning a bigger yield. Hard money loans are usually short-term in nature. Unlike bridge loans, which are offered to creditworthy commercial developers whose property isn’t yet ready for permanent financing, a hard money lender provides funding to borrowers who may be experiencing financial distress.

Getting the Best of Your Hard Money Loan

The generally unfavorable terms that hard money lenders offer shouldn’t eliminate them from your list of options should traditional financing become unavailable. For example, if your business is facing bankruptcy or foreclosure, you are in arrears on an existing loan and you have strong reason to believe that significant income is forthcoming, a hard money loan may offer temporary, albeit costly, respite.

How Hard Money Loans Work

Your business’s hard money loan will use the existing property as collateral and will usually operate as the first lien holder. The loan will use a quick-sale appraisal when determining how much funding they are willing to provide and, should the property be sold, the hard money lender will occupy the first position. That means the lender gets paid before any other party, including mezzanine lenders and the business itself.

Generally, although some hard money loans are an option of last resort, they can provide a helping hand when a business needs it most. In the commercial marketplace, “hard money” and “bridge financing” may be used nearly interchangeably.

Securing a Hard Money Loan

Private lenders typically offer hard money loans at distressed property values due to losses the industry accepted during the real estate crashes of the 1980s and ‘90s. Should you seek a hard money loan, do not expect an appraisal on full market value, as hard money lenders often consider only what a property might sell for in a distressed sale.