Hard money tends to get a bad rap in the financial press. That is unfortunate because it is actually a particularly good financial tool under certain circumstances. Sure, interest rates are high, and terms are short. But there are plenty of circumstances for which hard money is the best option.
The thing to note about hard money is that reputable lenders run legit businesses financed by private money. They are kept in business by a few core groups of borrowers who make up the bulk of their business. Below are descriptions of just a few of those borrowers. If you believe you are a viable candidate for hard money, pay close attention to what you read in the next few paragraphs.
Real Estate Investors
Real estate investors are by far the largest single group of borrowers who routinely turn to hard money. Despite banks being more than happy to make residential mortgages for individual home buyers, they are not necessarily enthusiastic about helping real estate investors. That can be a problem, especially in tight markets.
Actium Partners, a hard money lender in Salt Lake City, Utah, made a loan some years ago to an investor with a finalized agreement to purchase an attractive multi-family apartment unit. The investor had already lined up bank financing. Yet three days before closing, on a Friday morning, the bank pulled out. They did not want to take the risk.
Actium Partners stepped in right away. They sent a representative to appraise the property that afternoon. Once given the green light, Actium got the paperwork drawn up. On Monday morning they squared things away with the title company and the money was transferred. Actium did in fewer than twenty-four business hours and would have taken a new bank months to complete.
Another primary demographic group hard money lenders target are growing businesses. As for company size, that is not really an issue. Some hard money lenders work exclusively with small- and medium-sized businesses. Others are willing to work with big corporations.
A small business might turn to hard money to expand its local footprint. A mid-sized industrial operation might apply for a bridge loan to make capital improvements. The biggest hard money deals usually involve corporations looking to acquire or merge with others. At any rate, hard money will fund what banks will not touch.
Organizations with Debt
Next up are organizations with existing debt that needs to be managed. These could be businesses or nonprofits. Rarely are they individuals. To illustrate this particular principle, we will go back to Actium Partners and another loan they made some time ago. This loan was for a company looking to settle with another creditor.
Apparently, the company had an outstanding line of credit with a traditional lender. When that lender was not willing to renew their arrangement, it became clear that the company would have to settle its outstanding debt. They turned to Actium Partners for a short-term bridge loan to close out the account. Once closed, the company was able to arrange for another line of credit. They used that line to repay Actium.
All three scenarios outlined in this post would have been nearly impossible if borrowers had to rely exclusively on banks. The reality is that bank practices give life to hard money lending. Private lenders do not necessarily mind. They are happy to step up and do what banks cannot or will not do. That’s the beauty of the free market system. Those organizations that keep hard money lenders in business choose hard money because the other options don’t work for them.