Owning a business can be the path to financial freedom for many individuals, particularly those who have found a niche or unfulfilled need in their area. However, the world of small business ownership can be a cutthroat one, and while you're trying to get your fledgling business off the ground, you may find yourself working much longer hours (for much less pay) than you ever did at a W-2 job. If you think your business will continue to grow, but find yourself using most of your daily receipts just to keep the lights on, you may have started to look into your lending options. Read on to learn more about hard money lenders to determine whether this is your best way out of a sticky financial situation.
What is a hard money loan?
This is a type of asset-based loan that is generally secured by real estate. Unlike "soft" money loans, which will usually take the borrower's ability to repay into account, a hard money loan is based solely on the value of the collateral property. As a result, hard money loans are generally for a lower loan-to-value (LTV) ratio than would be available through a traditional commercial mortgage -- this ensures that in the event the borrower fails to repay the loan, the lender will be able to foreclose on the property and recoup its investment without losing money in the event of a market drop.
Many business owners and investors seek out hard money loans for a short term cash infusion in lieu of other types of loan funding or venture capital, which can have higher interest rates or come with strings attached. In other cases, entrepreneurs will utilize a hard money loan (along with their own cash down payment) to purchase commercial properties for which they otherwise wouldn't qualify.
Should you take out a hard money loan to help get back on your feet?
The answer to this question depends largely upon the circumstances that have put you behind the financial eight ball. If you're trying to grow your business but find it difficult to do more than scrape by with your current profits, a hard money loan on your current building (or even your home) can give you the breathing room you need to lease additional storefronts, hire more staff, or take other steps to boost the number of customers served.
On the other hand, if you don't have solid financial data supporting your business's growth, or if you're being sunk by increased competition or rising overhead expenses that you can't do much to control, you may be putting your home or store at risk of foreclosure by taking out a hard money loan. Before pursuing this type of financing, it's important to take a step back and really examine the continued viability of your business (and your ability to repay the loan) to make sure you're not throwing good money after bad.