Let's first agree on the definition of hard-money business loans before we move any further. Hard money business loans, in general, are usually secured by real property.
We define a hard money loan to be a source of funds that are invested in a business, and the lender is not typically concerned about how the funds are applied.
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Lending criteria for hard money loans are primarily based on the equity in real estate:
These are typical characteristics:
1) Private lending sources
2) Short interest terms of one to three years
3) Upfront fees on closing
4) Short in duration
5) Use of funds, not a focal point
6) Limited number of debt covenants, if any, and
7) Interest-only payments are quite common
8) Failure to pay results in the sale of assets to retire the debt
Although hard money lenders can be criticized, they have a real and important role in the commercial finance market:
- Hard money loans are generally easier to apply for than conventional loans of comparable size.
- Hard money is often less expensive than cash flow financing options like factoring and subordinated debt.
- These funds can be used as a bridge loan and are usually only available for a very short time. The lower the cost, the better.
- Even at a high-interest rate, an interest-only payment can be less draining on cash flow.
- Hard Money can be extended against assets other than real estate, provided that the principal security for the loan is still real estate.