Real Estate Tips |6 min read

Hard Money Business Loans: Everything You Need to Know

Last updated October 1, 2024

Getting approval for a business loan can be quite challenging for new businesses and startups, especially if you don’t have established business credit.

While it carries more risk, a hard money business loan could be a viable solution for investors who need capital for a startup business, and traditional lenders aren’t an option for them.

In this guide, we’ll discuss everything you need to know about hard money business loans, and how you can qualify for this type of funding.

What are Hard Money Business Loans?

Hard money business loans are a type of loan where a business uses its property as “collateral” to get funding quickly. Unlike regular or traditional business loans that usually look at how long you’ve been in business, your credit score, or how much revenue your business makes – hard money business loans focus mainly on the value of the property you offer as “collateral.”

As Baltimore hard money lenders, we often witness hard money business loans being utilized for purchasing, constructing, renovating, or refinancing properties intended for commercial purposes. However, these loans are usually more expensive due to higher interest rates and shorter pay back periods.

If a business can’t pay back the loan, the lender can take the business property used as collateral.

How Hard Money Business Loans Work

As we mentioned above, hard money business loans work by providing businesses with quick access to financing, using the business’s property as collateral.

At first, the business applies for a loan with a hard money lender, who will then evaluate the value of the collateral property along with other factors. After that, the lender assesses the property to determine how much money they can safely lend. This is also known as a loan-to-value (LTV) ratio.

If the lender is satisfied with the valuation, they will offer loan terms, which typically include higher interest rates and shorter repayment periods than traditional loans. Once the terms are agreed upon, the funds are quickly disbursed to the borrower.

Note that the business must repay the loan within the agreed timeframe. If the business fails to repay the loan, then the hard money lender has the right to seize the collateral property to recover the owed amount.

Hard Money Business Loans vs. Traditional Business Loans

Aside from the points we mentioned above, there are a lot of differences between hard money business loans and traditional business loans. Let’s take a look at a few of these points:

	Traditional Business Loans	Hard Money Business Loans
Lending Criteria	Creditworthiness, business history	Value of collateral property
Approval Speed	Can take weeks or longer	Fast, often within days
Interest Rates	Generally lower	Generally higher
Repayment Terms	Longer-term, most likely several years	Short-term, typically a few months to a few years
Loan Amount	Based on credit, revenue, and other factors	Based primarily on property value and other financial factors
Credit Requirements	Minimum credit score required depending on the lender	Credit score is still important but they are more focused on collateral.
Risk to the Borrower	Lower; longer terms, lower rates	High; potential loss of property if the loan defaults

Advantages of Hard Money Business Loans

Now that you know the differences between hard money business loans and traditional loans, let’s focus on the advantages of hard money business loans, especially for startups.

Fast Approval and Funding: One of the biggest advantages of hard money loans is the speed of approval and disbursement. Businesses can obtain financing in a matter of days, which we know is crucial for time-sensitive investments or expenses.

Less Focus on Credit Requirements: As we previously said above, hard money lenders primarily focus on the value of the collateral rather than solely the borrower’s credit score. While financial history is still a factor, this makes it easier for businesses with less than perfect credit or limited financial records to secure financing.

Flexibility: Hard money loans often come with more flexible terms negotiated between the lender and borrower. Most of the time, the repayment terms can be negotiated on what will work for you and your business.

The loan amount is based on property value: Although this is a bit of an advantage and a disadvantage, the loan amount from hard money business lenders will be based on the property value. Unlike traditional business loans, they tend to look more at the business’s revenue and profitability before you get approval.

Alternatives to Hard Money Business Loans

Practically speaking, the best alternative to a hard money business lender primarily depends on the purpose of your loan and individual needs. That said, let’s talk about a few of the options available to borrowers.

Business Lines of Credit

Generally speaking, business lines of credit work like a credit card, where the business gets to use a certain amount of money when you need it. You can take out money from this credit line anytime, and you only pay interest on the money you use, not the whole amount you could use.

SBA Loans

An SBA loan is a type of loan for small businesses that can be used for starting up, covering daily expenses, growing the business, buying property, and more. These loans are given out by private lenders but are guaranteed by the federal government, specifically through the Small Business Administration.

Equipment Financing

Equipment financing is a type of loan that helps you buy equipment for your business. When you get this loan, you agree to pay back the amount borrowed, along with interest. Similar to hard money business loans, the lender might use the equipment as collateral. This means if you can’t pay back the loan, the lender could take the equipment.

Peer-to-Peer Lending

Peer-to-peer lending (P2P) is a form of business financing where many private investors lend money to a business using an online platform. The goal is for both lenders and borrowers to receive better interest rates than what banks offer. This method offers businesses easier access to loans through digital platforms.

Venture Debt

Venture debt financing is a type of funding that early-stage companies use when they need money but don’t have a steady income yet. Unlike regular loans, venture debt comes from lenders who specialize in working with risky startups. Venture debt is often used together with selling ownership stakes (equity) in a company to raise money for growth.

How to Qualify for a Hard Money Business Loan

Practically speaking, hard money business loans don’t require a credit score to start. As we mentioned above, if you have a great business property or just a property with great value, then hard money business lenders may be willing to lend you the funds you need to start your business venture.

Your Best Partner for Hard Money Loans

Securing a hard money loan for your business can be a strategic move to quickly access capital for growth and opportunities. Whether you’re expanding operations, purchasing equipment, or navigating a cash flow gap, choosing the right lender is crucial.

A reliable lender will not only provide competitive rates and flexible terms but also offer personalized guidance to align the financing with your business objectives.

Maryland Hard Money Lenders are trusted experts in hard money loans. Our dedicated team understands the urgency of your needs and offers streamlined solutions tailored to your industry.