When Are Hard Money Loans A Feasible Funding Option?
Hard Money Loans
Hard money loans are a way to get business money for your commercial property if you have less than stellar credit or your business financial statement is not what it could be. Two characteristics of hard money loans are quick closings, sometimes as short as 7 - 10 days, and high interest. Interest rates can range from 6 - 12% on this type of financing. Hard money may also cost you an additional 3 to 10 percentage points more than a commercial real estate loan from a conventional lender. These substantially higher interest rates are necessary to compensate for the increase risk to the lender.
These are short-term loans. You may be able to get a term up to 3 years but the typical term is for one year. Some lenders will also charge large exit fees when the loan is paid off. There also can be large late fee charges if you are late in repaying the loan. The loan-to-value (LTV) is usually in the 50 to 65% range. A low LTV will enable the lender to sell the property rather quickly in case you default on the loan.
When Does A Commercial Hard Money Loan Make Economic Sense?
If your business is in financial trouble such as being close to bankruptcy or foreclosure, acquiring conventional funding will be extremely difficult. Short-term hard money may be your only alternative. Your credit rating may have decreased substantially during the recent economic decline. This would be another reason for acquiring hard money.
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Some commercial hard money lenders have large pools of funds and others assemble a new group of investors for each funding opportunity. The funds may range from as little as $10,000 for single family homes to $4 million or more in commercial hard money loans.
Commercial Bridge Loans are similar to hard money funding in that both types are short term and expensive. There are slight differences. The bridge loan is primarily a short-term loan to facilitate the closing on a property or to begin the rehabilitation of a property while waiting for the placement of permanent financing. The bridge loan will usually be paid off when long term financing is obtained.
A bridge loan will seldom go higher than a 65% loan-to-value of the property. The term for this type of financing is six months to one year. Longer terms may be negotiated with some lenders. Interest rates are usually close to or equivalent to hard money rates.
An Example Of Use Of A Bridge Loan
You are planning to take your company public. That is to issue an initial public offering (IPO) and you need money for operations during this much involved a detailed legal process. A bridge loan could provide you with the funding to maintain operations during this time period.
Another example is that if you inherited a commercial property with a lot of deferred maintenance and a high vacancy rate. The property only qualifies for $500,000 in refinancing based upon the current cash flow. You may be able to get an $800,000 bridge loan. You could pay off the $400,000 first mortgage and have $400,000 to make repairs and upgrades to the property. The attractive refurbished building will attract new tenants and allow you to increase the rent of the current tenants. The increase in cash flow will also increase the value of your property. You will now be able to refinance the bridge loan and cash-out your newly created equity. You may get a new loan for $1,200,000, payoff the $800,000 and put $400,000 in your bank account for your next project. Remember you still have your upgraded, fully rented building cranking out a positive cash flow each month.
Hard money and bridge loans are financial tools; when used wisely and carefully can help you keep your business operating smoothly.
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