SBA Loans vs. Hard Money for Investors

There are plenty of ways to finance real estate. However, the route you take may depend on your investment strategy, history, and goals. Today, we’re going to discuss two different loan types–SBA (Small Business Administration) loans and hard money for investors. Read along to learn about each loan type and which is best for your next real estate purchase. 

Contents of This Article: 

• SBA Loans vs. Hard Money for Investors
• Pros and Cons of Each Loan Type
• Which Loan Type Is Right for Your Investment?
• Find the Right Maryland Lender for You

SBA Loans vs. Hard Money for Investors

If you’re looking to earn income through real estate, choosing the right real estate loan in Maryland is crucial. For many investors, Small Business Administration (SBA) loans and hard money loans are two options that can fund real estate purchases. However, they serve very different purposes and are geared toward different strategies.

What Is an SBA Loan?

The Small Business Administration (SBA) provides long-term, government-backed loans to small businesses. While they can be used to buy real estate, that’s not the only purpose of SBA loans. For instance, they can be used for startup costs, working capital, equipment purchases, and more.

It’s important to note that these loans aren’t issued by the SBA itself. Instead, they’re provided by lenders like banks or credit unions, with a portion of the loan guaranteed by the government. This makes lenders more willing to approve financing for qualified borrowers. 

That said, real estate investors usually look toward SBA loans when purchasing owner-occupied commercial properties, like office buildings, retail spaces, or warehouses where their business will operate. 

What Is a Hard Money Loan?

A hard money loan is a short-term, asset-based loan commonly used by real estate investors. Unlike traditional lending options that rely on credit scores and financial history, hard money lenders focus on the value of the property purchased or used as collateral. 

Hard money loans are typically offered by private lenders or companies, designed for fast and convenient access to capital. They’re especially popular for fix-and-flip projects, distressed property purchases, or bridge financing–all situations where traditional financing isn’t feasible. 

While hard money loans are convenient, they come with higher interest rates and shorter terms. However, they have more flexible qualification criteria compared to SBA loans. 

Pros and Cons of Each Loan Type

No financing option is entirely perfect. However, if you’re looking for the right loan for your next investment, it’s essential to evaluate the pros and cons of each loan type. Here are some of the pros and cons of SBA loans vs. hard money for investors. 

Benefits of SBA Loans for Investors

• Lower Interest Rates- SBA loans offer lower interest rates, usually between 5% and 8%, making them one of the more affordable financing options.
• Longer Loan Terms- Repayment terms for SBA loans can be as long as 25 years for real estate purchases, which helps investors keep monthly payments low and cash flow high.
• Smaller Down Payment- Down payments for SBA loans can be as low as 10%, which allows investors to use capital for other investment needs.
• Access to Larger Loan Amounts- Investors can borrow up to $5 million or more, making SBA loans great for larger projects or multi-property purchases.
• Government-Backed- SBA loans are partially guaranteed by the government, which reduces the risk for lenders and can increase your chances of approval if you meet the right criteria.

Disadvantages of SBA Loans for Investors

• Strict Eligibility Requirements- SBA loans are much harder to qualify for than hard money loans. They require good credit, strong business financials, and a detailed plan for how they’ll be used for business purposes.
• Slower Funding Timeline- Approval and funding for an SBA loan can take anywhere from 30 to 90+ days, which isn’t great if you’re looking at a time-sensitive deal.
• Extensive Documentation- You need to come prepared with the right documentation. For instance, borrowers have to provide personal and business financial records, tax returns, projections, and more.
• Owner-Occupancy Requirement- The property being financed must be at least 51% owner-occupied, which makes SBA loans unsuitable for most rental investments.

Pros of Hard Money for Investors

• Quick Access to Capital- Hard money loans can be approved and funded in just a few days, making them great for competitive markets or auction purchases.
• Flexible Approval Criteria- Lenders focus more on the property’s value and potential than on a borrower’s credit score, income, and financial history.
• Perfect for Flips and Rehabs- Hard money loans are generally used for fix-and-flip projects, BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategies, or distressed properties that most traditional lenders avoid or deny.
• Fewer Restrictions- Private lenders have their own terms, which can offer more flexibility in structuring deals. For instance, they’re generally more open to working with borrowers who wouldn’t qualify for traditional bank loans.

Cons of Hard Money for Investors

• High Interest Rates and Fees- Hard money loan interest rates are high, typically ranging from 8% to 15%. With this, they have additional fees that can significantly raise the cost of borrowing.
• Shorter Repayment Terms- Most hard money loans must be repaid quickly–within 6 to 36 months, which puts pressure on investors to perfect their exit strategy.
• Higher Down Payment Requirement- Many hard money lenders require significant down payments. For instance, you may need to put down 20% to 30%  or more, especially on riskier deals.
• Risk of Losing Property- Since hard money loans are asset-based, failing to pay your loan can result in you losing the property used as collateral.

Which Loan Type Is Right for Your Investment?

Choosing between an SBA loan vs. hard money for investors depends on your investment goals, timeline, and risk tolerance.

For instance, you’d likely choose an SBA loan if you’re investing in an owner-occupied commercial property and want long-term financing. With an SBA loan, you’ll have lower interest rates and more stability. However, you’ll have to have good credit and a solid financial history.

On the other hand, you’d want to choose a hard money loan if you need to finance a property quickly and you don’t qualify for a traditional real estate loan. These loans work great for fix-and-flip projects or other non-traditional property investments. However, if you go this route, you need to have a solid, clear exit strategy, such as refinancing or selling the property, so you don’t risk losing your investment. 

Find the Right Maryland Lender for You

Investing in real estate is a great way to earn an income. However, choosing the right type of financing is important and can depend on your goals, investment strategy, and property type. Today, we reviewed SBA loans vs. hard money for investors and when to choose which loan type. 

If you’re looking for a hard money loan, Maryland Hard Money Lenders can help. Our team of real estate loan professionals can help you finance your next investment property quickly and efficiently. Learn more about our lending process or start our initial loan application today!