Hard money loans are part of the world of asset based lending, and in simplest terms, they are asset based loans.
And while there may be several different potential definitions or variations to the term “Hard Money”, for the purposes of this post I’m referring to it as an asset based loan whereby the lender is primarily making a lending decision based on the value of the security being offered and the lender’s confidence in his or her ability to liquidate the assets if the loan goes bad.
True hard money doesn’t really care if the loan goes bad or not as the lender is completely comfortable going through the legal process to gain control and ownership of the assets and liquidate same to get their money back.
In many ways, this is the purest form of lending where a promise made is a promise kept. Many people compare hard money lenders to loan sharks, but there is a considerable difference between the two starting with the fact that no legitimate lender is going to break anyone’s legs or off their friends for lack of payment. And the interest rate, security registrations, and lending practices still must conform to the laws of the land.
The only real similarity to the two is that they are both linear, black hearted approaches to lending whereby recovery actions are swift and not subject to emotional biases or personal considerations. Or at least that’s typically the approach if someone is going to survive as a hard money lender.
From the lender’s point of view, the deal is all about the available security being offered and the all in position of the borrower. The more committed the borrowers are to their business or need for money, the harder they will also work at paying the loan back and retaining what they have.
Hard money also only comes into play when all other options for business financing have been exhausted in most cases, so its not like anyone has a gun pointed to the borrower’s head. They are entering into the lending agreement willingly and many times gratefully as the hard money business loan provider is likely the lender of last resort.
Most hard money lenders work through broker networks to make the market aware of their available money. So typically they are not hard to find. In terms of the cost and terms of financing, each deal is likely going to be customized to the situation with many hard money lenders charging what the circumstances will bear. In general terms, the cost of financing is going to be equivalent to a return on equity because that’s essentially the type of risk the lender is taking. And to manage risk, the lender will consider every form of registration available and look to secure any and all assets owned by the borrower, even if in some cases they are in third or fourth security position.
Like any source of capital, the decision to accept a hard money loan or not should be based on the foreseeable cash flow of the business. If the business can’t see a path to repay the loan, then it shouldn’t take it. This is somewhat the reverse of conventional financing where the lender decides if the cash flow is sufficient to support repayment. But with hard money, the repayment decision is more in the hands of the borrower.
Hard money, as I have described it, is a loan of last resort and should be pursued and managed as such. The consequences of not meeting the repayment requirements is foreclosure and asset liquidation. While one could argue that this always is the case, most conventional lenders are much less precise and surgical as a hard money lender when it comes to getting their money back. Creative borrowers will work all kinds of angles to block foreclosure and postpone or get out of repayment. Good luck trying to do that with a hard money lender.
Like anything else in life, its buyer beware. But it does have a role, and used properly, can save a business or at least give the owner one more fighting chance to make a go of things.