Getting A Grasp of Hard Money Loans
The current credit crunch has resulted in many looking to alternative financing channels such as private money. One area that more and more people are looking to is the area of hard money loans.
Liquidity is the key to finance. Assets can be valuable, but they do not really help if you need to spend money. Hard money loans file this specific financing niche. These loans convert your illiquid assets into cash you can use.
Flexibility is the key to finance. Owning something that has value, but cannot be used financially is the ultimate frustration. An asset such as a building or machinery is valuable, but does not pay the bills.
Hard money loans often sound like asset based loans. They are similar except hard money loans are easier to get because the lender is willing to overlook your poor finances and focus only on the value of the asset.
A traditional lender will not lend money to a business or person that has a valuable asset, but poor revenues or overall finances. The problem is the bank cannot justify the risk to regulators, particularly in this market.
With the threat of risk comes the promise of profit. Nothing ventured, nothing gained as they like to say. While a hard money lender is willing to take on the risk of your situation, they expect to seriously profit from doing so.
The cost of hard money loans can be staggering. Interest rates can easily be double the prevailing rate of normal rates issued by banks. The points are also a killer. Depending on the loan, the lender can charge 6 to 15 points or more.
You are probably shocked at the staggering cost involved in these loans. Yes, they are pricey, but in many situations the price is not much compared to the potential expense of not getting financing.
Assume I have a business in a building I own. Business is not good, but I forecast that it will pick up in three months. I need money now. My building is free and clear. I cannot get a traditional loan because of poor cash flow.
With millions in revenue just a short time away, the cost of a hard money loan really looks like a minor problem. The business is not buying a good load, it is buying time until that revenue starts coming in.
Are hard money loans for everyone? No. That being said, there are definite situations where it makes serious sense.
Leave a Reply