These two loan types are among the most common business loans granted to small companies, especially start-ups, but they are often confused for one another by beginners. That’s not hard to do, since hard money loans generally come from private lenders outside the traditional banking and lending infrastructure consumers are most familiar with. Instead, they come from private money lenders for real estate and other assets who offer financing based on the value of the hard asset used to secure the loan. These hard money lenders make up an essential resource for both investors and entrepreneurs in a number of industries, but they are especially important for those in real estate investment.
So What Is a Private Money Loan?
Private money loans are loans from friends, family members, acquaintances, or business associates. They can sometimes be provided by private investment lenders, but under those circumstances they’re not automatically hard money loans unless they are structured as such. Often, especially with family, private loans have either little or no interest, but with private lenders the matter is different. In those cases, the private loans are structured according to the offerings the lender is comfortable providing, which might include a hard money option, but might also include traditional commercial loan structures, mezzanine financing, or alternative borrowing structures. Some are even unsecured capital loans. It’s a broad category that overlaps with loans from traditional institutions in some areas.
What, Exactly, Defines a Hard Money Loan?
For starters, the provider. The best hard money lenders in California are all firms that would be considered alternative lenders by most traditional business finance specialists. They can be investment funds, loan brokers capable of underwriting certain debt structures independently, or specialist financing providers whose business model is based on innovating debt structures. There’s a lot of diversity in the field. What they all have in common is that they use the same rough definition of hard money when setting up a loan.
- Working capital with no restrictions
- Secured with an asset, usually real estate
- Moderate capital costs
Since these loans are secured to a real asset with a hard valuation, they are not as expensive as unsecured loans for most businesses an individual investors. That makes them attractive as a method of financing real estate acquisitions, because you can tie the loan to a property that has no other debt but use the capital for a new acquisition, paying off the hard money loan in installments from your portfolio income or from sales of properties you already have listed for turnover. The possibilities are as broad as your imagination in that regard.
Using Hard Money Loans To Flip Properties
One of the best ways to finance a property you intend to improve and resell is by accessing short-term funding based on its value, then using that capital for improvement. This can provide you with funds to cover the closing if you’ve got a loan provider who can work with you to do that, but it can also provide the funding you need to improve a property if you’re paying cash for rehab acquisitions at this phase of your career.