Hard money might seem like a mystery to people who have never had a need for it. Truth be told though, it is a traditional form of lending that has been around for centuries. It gets its name from the fact that lenders require hard assets as collateral.
As a typical consumer, you are not likely to need hard money at any point in your life. You cannot get a hard money loan structured as a 30-year mortgage, so that’s off the table. But the need for hard money could change under certain circumstances. To illustrate the point, here are five scenarios for which hard money might be ideal:
1. A Fix-and-Flip Venture
House flipping was all the rage back in the 1990s and early 2000s. Plenty of people still do it. Unfortunately, a lot of them run into trouble with bank financing. The fix-and-flip business is risky, so banks tend to shy away from it.
There are hard money lenders that specialize in fix-and-flip. They help investors acquire residential properties at lower prices, fix them up, and put them back on the market. Most of the time, the loans have exceptionally short terms. Six months is not unusual.
2. Commercial Real Estate Investments
Just like there are some hard money lenders who specialize in fix-and-flip, there are others who prefer to invest their money in commercial real estate projects. Salt Lake City’s Actium Partners is one such firm. They have been known to fund everything from commercial office buildings to multi-unit apartment complexes.
3. Business Expansion
Next up, hard money can be used for the purposes of expanding a business. Perhaps a small company wants to open a second location in a neighboring county. The business’s current assets could act as collateral for a hard money loan that could be put toward acquiring a facility and filling it with equipment. A future small business loan would pay off the hard money loan.
4. Debt Restructuring
Larger companies sometimes turn to hard money as a means of restructuring debt. For example, you might have a company fast approaching the maturity date of an outstanding loan. If their bank will not restructure, hard money could pay off that loan and buy the company time to apply for new credit with a different bank. This sort of thing happens more frequently than most people know.
5. Mergers and Acquisitions
The biggest hard money deals occur in the world of corporate mergers and acquisitions. This particular arena is where the big boys come to play. Instead of hard money loans measured in hundreds of thousands of dollars, you are looking at hundreds of millions.
Turning to hard money to facilitate a merger or acquisition is risky business for both parties. Lenders need to be absolutely sure that the transaction includes a viable exit strategy that minimizes their risk, while the borrower needs to have a solid plan in place to make good on the loan as promised. When you are talking about that much money, you can never have enough guarantees.
High Rates in Short Terms
In all five of these scenarios, high rates and short terms are always expected. Hard money lenders do not like to hang around for too long. They want to put their money into a project and get it back out fairly quickly. That’s why it’s rare for a hard money loan to be extended beyond three years. One to two years is about average.
So what do you think? What are the chances of you ever needing a hard money loan? Unless you are involved in business, probably slim to none.
