Business is a complex game that involves a strategic shuffling of funds and assets to achieve favorable results. As with any fierce competition, one approach is never enough. Sometimes you need to strike hard and fast even if it means you may be taking a greater risk, while other times the best advice is to be cautionary. There are also moments when you find yourself at the mercy of your situation.
When it comes to getting a loan, there are many options. Each has its pros and cons. If you've been considering a hard money loan, chances are, you've found yourself at the mercy of your situation.
What is a hard money loan?
Hard money loans are short-term loans that are funded by private investors and secured by real estate. Hard money loans have two distinct advantages over bank loans.
Pros of taking a hard money loan
The first advantage is a much quicker turnaround. In most cases, a hard money loan can be funded in a fraction of the time it takes for a bank loan to be funded. The approval can happen as fast as the same day. However, two days is more typical. The other advantage is only beneficial to those who might not have the best credit. Since hard money loans are secured by real estate, the borrower's credit is not as important as the value of the property. If a bank has turned you down, a hard money loan might be a viable option.
Cons of taking a hard money loan
Keep in mind that a borrower can only expect to get a loan for up to 70 or 75 percent of the current value of the property. Also, private lenders will foreclose more quickly than a bank, and it can be for any breach of terms, not just a missed payment. Hard money loans are a bigger risk to the lender. Because of this, you can expect interest rates of up to 15 percent or higher, depending on the perceived risk. Additionally, points for a hard money loan can range from 2 to 4 percent.
Risk vs. reward
When it comes to deciding if a hard money loan is right for you, you must carefully weigh the pros and the cons to determine if the risk is worth the reward. If you need to move fast on an opportunity or your credit isn't ideal, the higher interest rate and shorter terms may be worth it. If you are not in an urgent situation and your credit is good, the traditional bank loan is a better route.
This article was written by Allen Foster for Small Business Pulse