It is strange to see blog posts insinuating the consumers can run out and get hard money loans when retail banks will not lend to them. I find it strange because such insinuations simply aren’t true. Not only that, but they are also easily proved false. Consumers don’t have access to hard money loans except under extremely rare circumstances.
Hard money comes from private lenders who specialize in a specific type of lending. Their hard money and bridge loans are intended for purposes that don’t apply to consumers. Even if a consumer were confident enough to apply for a hard money loan, he couldn’t get one without bringing three things to the table:
1. A Commercial Need
At the top of the list is a commercial need. A borrower without a commercial need shouldn’t even bother applying. He will most certainly be turned down. So what constitutes a commercial need? Here are a few examples:
- Real estate investments
- Business expansion
- Capital improvements
- Debt restructuring
Actium Lending is a Utah hard money lender providing hard money and bridge loans in three states. They specialize in real estate transactions. More specifically, they fund new acquisitions among investors. They do not fund consumer needs including:
- Residential home purchases
- Vehicle purchases (cars, boats, etc.)
- Home improvement projects
- College or university tuition
- Major medical needs
Consumer needs are the domain of retail banks and credit unions. They aren’t the types of things hard money lenders are interested in.
It should be clear at this point what hard money lenders are willing to fund. If it’s a consumer need, lenders will not touch it. If it’s a commercial need, a borrower can move on to the next two things.
2. Valuable Collateral
In hard money lending, collateral secures loans. If a borrower wants a hard money or bridge loan, he needs to bring valuable collateral to the table. He needs to offer something of value that will cover the amount he wants to borrow.
Because most of Actium’s loans go to real estate investors, the properties being acquired generally act as collateral on their respective loans. But Actium is free to accept any type of collateral. A business looking to expand might offer valuable equipment. A company looking to restructure its debt might offer land it holds on the other side of town.
Regardless of the collateral offered, it needs to have sufficient value. If necessary, some lenders will allow borrowers to combine multiple assets to create enough value. When all is said and done, lender and borrower need to work it out between themselves.
3. An Exit Plan
Finally, a borrower needs an exit plan to obtain a hard money loan. An exit plan is a reasonable strategy for paying off the loan on its maturity date. Without a doable exit plan, the borrower will not get a hard money loan.
Exit plans are vitally important because hard money loans are extremely short term in nature. On average, hard money terms are 6-12 months. They may go as long as 24 months, but rarely are terms any longer than that. Such short terms dictate a plan of action that all but guarantees the borrower will meet his obligations.
A commercial need, valuable collateral, and an exit plan are the three things every hard money borrower needs to successfully obtain a loan. Come to the table with all three and you are in good shape. Otherwise, you’re better off looking for financing elsewhere. Lenders do not compromise on these three things. They are key to safe and successful lending.
