There are many components that determine the success or otherwise of a project. At the very top of the list in no particular order, you’ll find factors like the project team, management and planning, the right tools, timing and capital. Take one of these factors out and you are guaranteed a failed project.
Let’s say you have this project idea and you’ve got everything planned for a roaring success but there’s a problem – no money…
In the past, nine times out of ten, you would have to approach the banks or other conventional lending institutions. Otherwise, you could go cap in hand to family and friends to help out. These days, your choices are more. If you’ve never heard about or never really paid attention to it, let us introduce you to the concept of hard money lending.
Bank Loan Alternatives
Hard money lending is an alternative but highly successful type of project financing in which the lender provides low leverage, short-term loans of between one to three years with relatively higher interest rates. This practice is also commonly referred to as equity lending, private lending or trust deed investing. These loans are issued by private firms, individual investors or groups of investors, and are backed by collateral in hard assets. Real estate is the most preferred and common form of hard asset.
Is a Hard Money Loan the Right Choice For You?
If you are resident in Nevada, for instance, and you need external financing, hard money lenders may just be your best option.
Note that not every property investment project would be an ideal choice for hard money funding. The peculiarities and expected timeline from start to finish will determine if your proposal will receive backing from the lender.
Generally, the shorter the project duration the better and more attractive to the lender. Let’s say you want to remodel an owner occupied property. Chances are high a hard money lender will turn you down. It would be best to look for other loan sources. But, if you have a time-sensitive commercial real estate project like a house flipping venture or a shopping mall construction then chances are high they’ll be willing to deal with you.
Many lenders usually prefer shorter term lending where they can close the deal in six months or less.
The Main Differences Between Hard Money Lending And Bank Lending
The banks have been around for ages, we all know that. As a result, they tend to already have a larger infrastructure, more staff, and resources to work with compared to the private lenders. The private lenders on their part usually have fewer people and resources to work with so there’s higher speculation, higher risk but less paperwork. The fact that there’s less paperwork is very appealing to borrowers. As anyone that has ever successfully obtained a bank loan will confirm, the paperwork can be intimidating.
Banks will ask for your credit history and proof of income because they offer loans based on the borrower’s perceived ability to pay back at regular (usually monthly) intervals.
Hard money lenders are not interested in your credit rating. The only information they will ask for is some basic personal information and the value of the asset you are offering as collateral. This makes them a very popular choice among people with poor credit history. Such people stand no chance with the banks.
Speed Of Approval
One of the factors for a successful project mentioned at the beginning of this article is the importance of timing. When an investor is in need of money quickly but for some reasons doesn’t get it on time, the whole project could collapse leading to colossal losses.
Banks will take their time to scrutinize every single aspect of your project application. They’ll check your qualifications for the loan, go through lots of paperwork and then study the project itself too. It’s not uncommon for loan applications to take weeks or months before approval and disbursement of funds, if ever.
For business people working with a tight schedule, you’ll be well advised to leave the banks alone and go for hard money instead.
Hard money lenders are used to financing quick projects and they are already structured with that in mind. Their in-house specialists know what’s at stake so they are more flexible bearing in mind that their lending company is getting a higher rate in return out of the deal. The final decision to approve the loan will depend on the value of the property and the amount of risk involved in the venture.
Do you find yourself becoming increasingly frustrated because you are handling a project but can’t get funds from the banks? Or maybe you’ve already started the project but are having a funding issue and time is fast running out on you. Just present your collateral to a hard money lender and they just might save the day.