Hard Money Loans: The Last Resort For Business Financing

Hard Money Loans: The Last Resort For Business Financing

hand a loans words in red, business transactionBusinesses and developers sometimes run into problems with finding much-needed capital, but hard money loans should be the last option that they consider. There are several reasons that hard money loans should be the financing source of last resort. These loans should not be used for anything other than short-term needs, and developers and business owners should pay them off as quickly as possible. A business transaction lawyer might assist clients with identifying better funding sources other than hard money loans to help them avoid potential problems.

What are hard money loans?

Hard money loans are private loans that are made to consumers, developers and business owners who are unable to secure capital from traditional funding sources. These loans are not credit-dependent and instead rely on the equity held by the properties on which they are loaned. They have sky-high interest rates and are meant for only short-term financing, often maturing within a matter of months instead of years. Some developers turn to hard money loans when they have been unable to find funding for their projects and need quick infusions of cash.

Why hard money loans should only be a last resort

With their high interest rates and short durations, hard money loans should only be used when no other options are available. Developers and businesses should immediately begin looking for refinancing options when they are approved for these loans because the terms will go by very quickly. If the borrowers default on the loans, the lenders will take the properties. The lenders require substantial down payments that equal the amount of equity that the lenders could expect to receive in the event of defaults, meaning that borrowers must expect significant capital outlays before they receive any loan proceeds.

A business transaction lawyer may help clients with finding other financing sources. There may be options available through the Small Business Administration. If traditional lenders are unwilling to help, developers and business owners might also want to consider crowdfunded financing as possible options. While hard money loans may initially appear to fill an immediate need, they can quickly lead to financial problems and the potential for losing the properties that the developers and business owners have invested their time, energy and resources in. These loans may be helpful for developers who will only need cash for a short time and who can quickly get refinanced.

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