Hard Money Business Loans: What Are They & Should You Get One?

Business owners in need of quick funding but with a spotty credit history can consider hard money business loans. As an alternative type of small business financing, these loans are secured with commercial property.

Hard money business loans are considered a riskier form of borrowing since they’re issued by individual investors or private lenders instead of traditional banks. Here’s what you need to know about hard money loans, plus alternative funding options for your business.

What is a hard money business loan?

A hard money business loan is a type of secured business loan where you pledge company property as collateral to finance the loan. The term “hard” refers to the difficulty involved in repaying these loans, which typically have quick repayment schedules and high interest rates.

Lenders primarily focus on the value of the property instead of a business’s credit profile, making hard money loans an ideal option for startups or bad-credit borrowers. Some hard money lenders don’t even consider a business’s credit score or annual revenue during the underwriting process.

Hard money business loans are typically used as bridge loans, helping business owners flip houses or invest in residential or commercial property. However, you can also use the funds for acquisitions, renovations or to cover ongoing working capital expenses.

While this type of fast business financing can help those unable to qualify for traditional financing, it’s crucial to understand the risks involved. Not only can the repayments be challenging to manage, the hard money lender can repossess the pledged property if you fail to repay the debt.

Hard money loans vs. traditional loans

While hard money loans and traditional loans can both help your business access the money it needs, there are some key differences worth considering.

• Type of lender: Typically, banks and traditional lenders don’t offer hard money loans. You’ll need to find a private business lender or investor who understands the real estate market and believes they can profit from it.
• Requirements: Hard money loan requirements tend to be less transparent than traditional business loan requirements, especially if you’re working with an unregulated private lender. That said, you typically don’t need a robust credit score or a lengthy business history to qualify for hard money business loans. Traditional lenders, on the other hand, often require a credit score of 670 or higher, plus two years of operation.
• Interest rates: You can expect hard money loan rates to run higher due to the increased lender risk. For example, hard money loan interest rates can range from 8% to 45% or more, whereas traditional business loan interest rates start as low as 6.25%.
• Repayment terms: Hard money loans usually have short repayment terms of two years or less, while long-term business loans can give you up to 20 or 25 years to repay your debt.
• Loan-to-value ratio: The loan-to-value (LTV) ratio shows the loan amount compared to the value of the property (in this case, the collateral). Since hard money loans are considered riskier, lenders may limit LTV ratios to around 65% — meaning you may have to provide a larger down payment. Meanwhile, a commercial real estate loan from a traditional bank may offer LTV ratios of 75% to 90%.

Hard money loans pros and cons

How to get a hard money loan

Because hard money lenders aren’t regulated in the same way banks are, hard money lenders face less regulatory scrutiny. Unlike a bank, which makes lending decisions based on a variety of factors — such as income, annual revenue or credit history — hard money lenders place more emphasis on the value of the property serving as collateral when making a loan. As such, the major factor to qualify for hard money loans is having real estate to put up as security for the loan, but that also means they come with much greater risk.

Alternatives to hard money loans

While hard money business loans can help your business quickly access cash with flexible eligibility requirements, the high rates and short repayment terms could be a dealbreaker. If you have time, boosting your credit score and building up your cash reserves can help you qualify for a more competitive loan.If you still need immediate access to capital, here are some other small business financing options with lenient eligibility requirements.

Equipment financing

Businesses needing to purchase or upgrade equipment can borrow up to $2 million or more with equipment financing. Low-credit borrowers and early-stage startups can often qualify since the equipment acts as collateral to secure the debt. You can also enjoy more flexible repayment terms, which generally range from six to 84 months.

Just note that the lender could seize the equipment if you fail to repay the debt.

Invoice financing

Invoice financing, also called accounts receivable financing, allows you to use unpaid invoices as collateral in exchange for a line of credit. You’ll need a steady stream of invoices to qualify, and you could run into hefty fees — though you may end up paying less than you would with a hard money loan.

Merchant cash advances

A merchant cash advance (MCA) can provide fast cash advances in exchange for a portion of your business’s future credit and debit card sales. While MCA lenders work with low-credit borrowers and don’t require collateral, this type of financing can be an expensive way to get funding — with APRs often in the triple digits.

MCAs are generally best reserved as emergency funding after you’ve exhausted all other options.

Term loans

Business term loans provide a lump sum of cash upfront with regular payments and accruing interest. Term loans can either be secured or unsecured.

You can use the funds on most qualified business expenses, such as hiring staff, payroll services, inventory, supplies, marketing campaigns, expansions and more.

Short-term business loans typically have terms ranging from three to 24 months, similar to hard money business loans. If you need more breathing room in your budget, long-term business loans have repayment terms ranging from six months to 25 years. Note that traditional banks tend to have stricter eligibility requirements, so you might prefer working with an alternative lender if you’re still building your credit profile.

 Learn more about the different types of short-term working capital loans.

Unsecured loans

While you don’t need to provide collateral to get an unsecured business loan, you may end up paying higher interest rates. Traditional banks will likely require your business to operate for two years or more, along with a steady annual revenue. If you struggle to meet the criteria, some online lenders offer business loans for bad credit with no collateral required.

Microloans

Microloans are smaller loans of around $50,000 or less designed to help business owners start and grow their businesses. Women-owned business and minority entrepreneurs can often find extra support with microlenders, even if you have a limited credit profile.