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Feb 23 2018
  • By wpengine

What are the Advantages of Using Hard Money Versus Conventional Financing or Cash?

You have a project that will ultimately yield a substantial return. The question now is how to finance your venture. You could try going the traditional route and get financing for a bank. There’s also the option of using your own cash to cover the costs. Instead of these two approaches, why not look into the benefits of securing a hard money loan? Here are a few reasons why this solution makes sense. 

Understanding the Basics

Hard money loans are generally not offered by large corporations. More often, they are provided by individuals or groups of individuals who come together for the purpose of providing loans to qualified candidates. While these loans tend to come with different terms and conditions, they are a great fit for certain projects, like buying and flipping a home. 

Streamlined Qualifications for Receiving the Loan

Lenders who offer hard money loans place more emphasis on two things. The first is what sort of comments are found on the applicant’s credit reports. The goal is to determine if there are any recent defaults, liens, bankruptcies or other issues that would cause the lender to hesitate approving the application. 

A second consideration is the ability of the applicant to repay the loan according to the contract’s terms and conditions. As long as the applicant provides collateral the lender finds acceptable and has a plan for repaying the loan on time, there’s a good chance of being approved. 

Unlike more traditional lenders, a hard money lender places little to no importance on your credit rating. Things that happened several years ago and are still affecting your score really won’t matter. How you’ve managed your debts more recently and what sort of security you can provide for the loan will be the focus. 

Faster Turnaround on the Loan Decision

Large lending institutions have all sorts of policies and procedures that must be followed before a loan can be approved. Muddling through all the details takes time. You could apply and end up waiting weeks for a decision. If the project you have in mind requires immediate action, that translates into a lost opportunity.

By contrast, hard money lenders have less red tape to go through. In some cases, you will be dealing with an individual or a couple of people. They do have a process they follow, but it’s simpler and requires less time. There’s a good chance of having an answer in one business week or less. 

Flexible Repayment Arrangements

You will find that some hard money lenders are willing to create a more flexible repayment schedule as part of the loan terms and conditions. For example, you may pay a little every week if that works best for you. Some will be willing to structure a plan with quarterly or semi-annual payments due. If the monthly installment approach is not a good fit for you, working with a hard money lender who is open to other approaches is the way to go. 

Ideal for Short-Term Financing

Loans of this type are not intended for long-term projects. They are ideal if you have a project that you expect to become self-sustaining or yield a considerable profit within the next couple of years. For example, you may want to buy a residential property, make repairs, and place the home back on the market for a higher price. Assuming you sell the property six months to a year after buying it, you can pay off the loan and enjoy the net profit from the venture. 

Great Bridge Loan Solution

Maybe your project will take several years to turn a profit, but you need capital to get started now. Hard money loans can serve as a bridge to get you until some long-term financing can be arranged. 

People who decide to purchase properties and rent them sometimes use this approach. The hard money loan helps with the purchase and upgrades. That in turn makes the property more appealing to tenants. As the money from the rental agreements come in, the owner makes the loan payments using those funds. In the meantime, the positive comments on the credit reports increases the score incrementally. About the time the loan is due for full payment, the debtor can obtain long-term financing, settle the balance on the hard money loan, and continue earning a revenue stream from the rental property. 

Keep Your Cash in Reserve

Many financial professionals discourage clients from using their own money for any type of business venture. The advice is usually to keep the cash in some type of interest-bearing account or at least use it to secure assets that can be converted into cash quickly if the need arises. If you secure a hard money loan to buy, repair, and sell a property, there’s an excellent chance of completing that flipping process and pay off the loan early. Through it all, you kept your cash on hand and remained relatively safe from financial distress. 

Only you can decide if a hard money loan is right for your project. Compare the benefits with other financing options and see what you think. You may find this solution will be the best one.

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