Trying to understand hard money by researching it online is a crapshoot. That is unfortunate because there are very few resources to look into, other than what you find on the internet. Yet that doesn’t change the fact that the internet is rife with misinformation on everything from real estate bridge loans to hard money for business expansion.
Unless you have a ton of personal experience with private lending, it is a safe bet that hard money isn’t what you think it is. It’s not a financing method of last resort for losers who can’t get loans any other way. In fact, this is one of the biggest hard money myths of all.
So what is hard money? It is defined by five key characteristics:
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1. Asset-Based Lending
First and foremost, the biggest thing that differentiates hard money from traditional lending is its asset-based nature. Banks and credit unions approve loans based on the full faith and credit of the borrower. Hard money lenders base their decisions on the value of a borrower’s assets.
Actium Partners out of Salt Lake City, UT offers the example of a client looking to fund the purchase of a commercial property. The property itself becomes the asset offered as collateral on the loan. Actium’s decision will be based almost entirely on how much that property is worth compared to what the buyer wants to borrow.
2. Targeted Lending
Next, hard money is targeted in the sense that lenders do not lend for just any reason. Actium loans are almost always for commercial real estate transactions. Commercial real estate is their specialty. Likewise, other hard money lenders focus their attentions on house flipping projects. Still others specialize in assisting landlords looking to add to their portfolios.
In contrast, your local bank offers all sorts of loans. They will fund your mortgage, your car loan, your home improvement project, your next vacation, and even your daughter’s wedding. They are much more broad in their lending approach.
3. Faster Lending
Private lenders utilize a business model that allows them to approve hard money and bridge loans pretty quickly. Likewise, loan processing is much faster compared to banks and credit unions. Actium Partners likes to illustrate this particular point by discussing a past loan project involving a real estate investor whose bank bailed on him just days before he was scheduled to close on a new property. Actium was able to approve and fund the acquisition in a single business day.
4. Short Term Lending
Hard money lending is also short-term lending. Where banks and credit unions will offer loans for up to 30 years in some cases, hard money and bridge loans generally have terms no longer than 3 years. Lenders prefer 2 years or less.
5. High-Risk Lending
Finally, the private lenders who make up the bulk of those in the hard money and bridge loan space are less averse to risk. They are willing to take on projects that more traditional lenders will not touch. As a side note, this is one of the reasons that hard money works so well for commercial real estate transactions.
Unfortunately for borrowers, the high-risk nature of their transactions generally means higher interest rates and fees. But paying a little more for the privilege of borrowing is well worth it when you need the speed and simplicity hard money offers.
Hard money is a legitimate form of financing that gets a lot of undeserved bad press. Anyone who has benefited from hard money can tell you that it is a worthwhile funding option that deserves more positive attention.
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