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What Are the Pros and Cons of Hard Money Lending?

Acquiring commercial property is expensive. More often than not, buyers have to do the same thing as their residential property counterparts: come up with a down payment and finance the rest. Among those things that make obtaining commercial property different is the availability of the hard money loan.

Actium Partners is a Salt Lake City private lender that specializes in hard money and bridge loans. The majority of their clients are looking to acquire commercial property. Those clients turn to a hard money because it is more appropriate to the transactions they are trying to complete. That being said, Actium Partners acknowledges that hard money is not the best choice for every deal. Hard money has its pros and cons.

1. The Pros

Hard money loans come from private lenders rather than banks and credit unions. Knowing this lays the foundation for discussing their advantages:

A. Fewer Lending Requirements

Hard money loans traditionally come with fewer lending requirements. That’s because hard money lenders are not subject to the same federal regulations that banks must adhere to. They have a lot more flexibility in processing, approving, and funding loans.

B. Fast Turnaround Time

A motivated hard money lender can turn a loan around in a matter of days. In fact, Actium Partners has been known to fund loans in as little as 24 hours. Bank loans can take weeks or months. Banks cannot work as quickly even if they wanted to.

C. Asset-Based

Hard money lending is asset-based lending. What does this mean? It means that lenders base their approval decisions on the value of the borrower’s collateral. Oftentimes, the asset being acquired acts as collateral on the loan. By contrast, banks make their decisions based on the borrower’s financial position, making loans harder to get.

2. The Cons

Based on hard money lending’s advantages, it is easy to see why property investors and businesses turn to it so often. But hard money also has its disadvantages:

A. Higher Interest Rates

Hard money lenders charge higher interest rates compared to banks and credit unions. It is due to the fact that asset-based lending is riskier. Where risk increases, so does the cost of borrowing. That is just the nature of the beast. At the time this post was written, hard money rates ranged from 6% to about 15%.

B. Shorter Loan Terms

Higher interest rates represent one way to mitigate risk. Shorter terms are another. This may be one of the biggest disadvantages to borrowers with limited cash flow. Nonetheless, the terms on a typical hard money loan are less than two years. Some hard money lenders will go as long as three, but they are the exception to the rule.

Terms can also be as short as six months when conditions warrant. However, a term that short is more likely to be applied to a bridge loan. A bridge loan is a type of hard money loan intended to bridge the gap between immediate financial need and future income.

C. Less Leniency

Finally, a big disadvantage of hard money lending is the lack of leniency. Should a borrower fall behind, they are usually given only a short amount of time to bring the loan current. Lenders are not afraid to seize assets immediately after said grace period expires. In light of that, borrowers have to be absolutely sure they can repay before they borrow.

Hard money is a valuable resource to certain types of borrowers. It is especially popular in commercial real estate. However, there are reasons to avoid hard money in favor of other options.

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