Many real estate companies use hard money loans regularly. This type of asset-based lending is a great fit for companies looking to purchase property because it cuts down significantly on the time needed for approval. Instead of waiting two or three months before being able to close on a property, real estate developers can use a hard money loan to complete the purchase in a few weeks.
Of course, if you’ve never used hard money loans before, it’s smart to take the time to do your homework. Like any type of financing, there are pros and cons to ABL financing that you need to be aware of. That way, you can minimize risks, avoid obstacles, and make your capital work for you instead of against you.
Why Are Hard Money Loans Easy to Apply For?
The benefits of hard money financing come down to the concepts of collateral and risk. Normally, banks are hesitant to lend money unless they’re sure they can get their money back with plenty of interest. Real estate represents a significant investment, so many banks put even more barriers to entry for regular businesses. They may require near-perfect credit ratings, a large down payment, and proof of significant annual revenue to even consider granting a loan.
Hard money is more accessible because it lets you use the property you want to purchase as collateral for the loan. This is an alternative guarantee for the lender that you plan on paying back the money. In exchange, the requirements for qualification are much lower. You still need to show that you have the funds needed to make payments, but your business doesn’t need excellent credit to qualify. Often, a score of around 600 is sufficient.
How Much Do Hard Money Loans Cost?
The total cost of hard money financing varies depending on the type of property you want to purchase, your credit score, and how you plan to use the loan. This type of financing has a loan-to-value ratio, which is the size of the loan provided compared to the property’s purchase cost. If you get a loan with an LTV of 80%, you must come up with the other 20% to complete the purchase.
Real estate businesses can usually meet these requirements without problems. They use the profits from past sales to finance their next projects. Your business needs to weigh the costs to make sure this type of financing is comfortable. The advantage is that hard money loans are extremely flexible.