If you are a small business owner in need of financing but are not able to qualify for a traditional business loan, a hard money loan may be the answer. A hard money loan is an alternative source of financing for small businesses.

What is a Hard Money Loan?

This type of financing is an asset-based loan that is used by businesses that are unable to qualify for traditional financing options. If something comes up that they want to invest in or if they have used up all of their lines of credit, a hard money loan may be what they need to meet their needs. This type of financing has high-interest rates attached, so they only need to be used for emergencies.

Qualifying for a Hard Money Loan

A hard money loan does not depend on the creditworthiness of the borrower, but on the collateral they offer. Typically, the entire value of the collateral will not be used. The lender will calculate a loan to value ratio, which is a percentage of the value of the collateral. If your collateral is not enough to secure the loan, you may need to include personal assets to help secure the loan.

How to Calculate Loan-to-Value Ratio

On a hard money loan, the loan-to-value ratio is determined by loan value and the appraised value of the collateral. The higher the ratio, the lower the chance of getting a loan. Typical hard money lenders will only loan about 70% of the value of the property. For most lenders, the loan to value ratio is a measure of risk.

For example, there’s a project that your company wants to take advantage of. This project costs $125,000. You need $90,000 to get in on it but can’t access traditional funding. You start by connecting with a hard money lender. They will calculate the loan to value ratio. The ratio is $90k/$125k, which is 72%. Depending on the requirements for this lender, they may or may not loan the 72%. If they do not, reach out to another lender. You will eventually find one that will loan you the money.

Interest Rates/Other Terms on a Hard Money Loan

Since the risk on a hard money loan is higher than a traditional loan, the interest rate is often higher as well. Other terms on hard money loans are also less than favorable than traditional loans.

Typically, interest rates start at about 12% and go up from there to around 29%. In most cases, the small business has to pay 4 to 8% in points. A 70% loan to value is usually the highest a lender will accept. You’ll typically be required to make a balloon payment at some time during the life of the loan. The term is short, typically only about 1 to 5 years.

Get a Hard Money Loan

A hard money lender is an individual or company that is offering funds. A hard money lender must have the funds and be able to move quickly take advantage of lending opportunities. The criteria for traditional business loans and sources do not affect a hard money lender. 

Contact Masters Commercial Capital Group today if you require a hard money loan. We will be happy to help you!