Finding the right kind of financing for a given business opportunity is often the key to capitalizing on the moment where profits are there for the taking. Loans for working capital are different from the loans you use to set up long term financing, however. Short term financing can be a bit more expensive, and that brings in risks for borrowers. Of all the short term loan options out there, though, hard money loans enjoy their seat of popularity for a lot of reasons. So what are the main advantages of using hard money lenders?
1. They Are Accessible With Imperfect Credit
The biggest reason hard money is popular with small business owners and investors is because credit does not play a make or break role in approvals. Your score still determines the cost of the loan to an extent and it can wind up being a factor when loans are turned down. Since hard money loans are based on collateral value and your income, though, the credit score you currently carry is a lot less important. That’s a good thing for investors too, because a bad deal can sink that score for a couple years even when you have other deals going well.
2. They Close Quickly
Real estate investors love working with private lenders because hard money loan closing times tend to be among the fastest there are. Even when banks or other traditional lenders have comparative programs in terms of LTV and interest rates, private lenders tend to be more nimble about application processing and cash distribution. As a result, flippers can close on a home before anyone else produces financing when they use the right hard money loans. That’s a huge advantage in today’s competitive commercial real estate market.
3. They Limit Your Capital Risk
Financing a property purchase with a hard money loan still means taking out a collateral-based instrument instead of taking on all the risk yourself. While critics of the loans consider this a downside, investors often consider it a necessity. If the project goes south, the defauilt on the loan is usually a fraction of the purchase value, even with the interest payments taken into account. That’s a much lower level of loss than if the property was a cash purchase and then things went bad. It still leaves most of your working capital intact for the next go round, which is an important consideration for any investor to make.