Before we go any further, let's make sure we all agree on what "hard money business loans" means.
For the purposes of this discussion, hard money business loans and hard money loans in general are usually backed by real estate.
Since the lender usually doesn't care how the money is used, I'll add that a hard money business loan is a source of money that can be put into a business operation.
When deciding whether to give a hard money loan, the main thing that matters is how much equity is in the property.
Typical features are 1) private lenders, 2) short interest terms of one to three years, 3) up-front fees at closing, 4) short terms, 5) no focus on how the money is used, 6) few, if any, debt covenants, 7) interest-only payments are common, and 8) if the debt isn't paid, the assets are sold to pay off the debt.
Even though some people don't like hard money lenders, they do serve a very real and important role in the commercial financing market.
For and against
Pro: The application process for a hard money loan is often much faster than a traditional loan application for the same amount.
Con: The cost of hard money loans is almost always higher than the cost of traditional real estate loans from banks and other large lenders.
Pro: Hard money can often be cheaper than other ways to finance cash flow, such as subordinate debt and factoring.
Con: Hard money business loans can be expensive because of the fees you have to pay up front. This can make the effective interest rate you pay over time much higher.
Pro: Because this is a bridge loan, the money is usually only needed for a short time. The shorter the time, the less it could cost.
Con: If an extension is needed but not given at the end of the interest term, the loan must be paid off in full.
Pro: Even if the interest rate is high, an interest-only payment can still be easier on the cash flow.
Con: Once you sign up for an interest term, it's the same as most fixed interest rate terms, where there's usually a 3-month penalty for paying out early.
Pro: Hard money loans can also be used to buy things other than real estate, as long as real estate is still the main security for the loan.
Con: If you fall behind on your payments, the process of foreclosure can happen quickly, and it usually happens as quickly as the local government will let it.
When a business has used up all of its traditional financing options and still needs money to run, grow, or take advantage of short-term opportunities, it might look into a hard money business loan.
Bridge loans are another name for hard money business loans. This is because repayment is usually due within one to three years.
If you are thinking about getting a hard money business loan, think about the following:
>>> Can you make money back? If you have a good, profitable business but can't get a bank loan because you need cash quickly, a hard money business loan could be a good choice.
>>> Do you have a plan for leaving? Keep in mind that a hard money business loan is really just a short-term loan that you will have to pay back soon.
If you can't plan your cash flow so that you can pay back the loan in full at the end of the term, a hard money business loan may not be a good idea.
>>> What else could you do? If your other options for financing are based on equity and require you to give up a portion of the business's future profits, a hard money business loan can let you keep control of the business and the profits it brings in.
What does it mean for my personal liability? If the other ways you can get money for your business are expensive and still require a personal guarantee, a hard money business loan may be a better choice.
>>> Can you bring in enough money? If a hard money business loan can't give you all the money you need, it might not be a good choice.
Business owners sometimes use hard money to buy time until they can get more money to cover all of their financial needs.
The problem with this strategy is that hard money isn't very patient. If it takes longer to get the extra funds than your cash flow allows, the hard money lender probably won't delay or restructure your debt servicing costs.
Instead, if you don't pay on time, they may take their security, which could put you out of business.
