Small Business Hard Money Loans: What Are They and Should You Get One?
A small business hard money loan is a short-term, collateral-based loan issued by private lenders or investors, rather than traditional banks. They are secured with commercial property, which serves as collateral if the borrower defaults.
Because lenders focus on the property’s value rather than your credit profile, hard money loans are a common option for startups and business owners with limited credit history who need fast access to capital.
What is a hard money business loan?
A hard money business loan is a type of secured business loan where commercial property serves as collateral. The term “hard” refers to the hard asset (commercial property) that secures the loan. Private lenders and investors issue these loans based primarily on the property’s value, which means your credit score and business history carry far less weight than they would with a bank.
Hard money loans are sometimes considered a type of bridge loan — short-term financing to cover a gap while longer-term funding is arranged. Business owners also use them to fund property acquisitions, renovations or to cover ongoing working capital expenses.
Because hard money lenders aren’t regulated in the same way banks are, terms, rates and requirements vary widely by lender.
A hard money loan may be worth considering if:
- You own commercial property you can use as collateral.
- You need funding faster than a traditional lender can provide.
- Your credit history is limited or your score doesn’t meet bank requirements.
- Traditional lenders have declined your application.
- You have a short-term financing need and a clear repayment plan.
Hard money loans vs. traditional business loans
Hard money loans and traditional loans both provide business financing, but they work very differently. Here’s how they compare across the factors that matter most.
| Hard money loan | Traditional business loan | |
|---|---|---|
| Lender type | Private lenders or investors | Banks and credit unions |
| Credit requirements | No minimum credit score; collateral is primary factor | Typically 670+ credit score; two or more years in business |
| Interest rates | 8% to 18% or more | Averages 7.2% for fixed-term loans |
| Repayment terms | Typically six to 24 months | Six months to as many as 25 years |
If a traditional loan looks like a better fit, check out our picks for the best small business loans.
Hard money loans pros and cons
Pros
- Straightforward application process: Hard money lenders don’t typically focus on traditional business loan requirements, so the application process tends to be simpler and faster.
- Fast access to funds: Hard money loans can fund in as little as a few days, which can be significantly faster than a traditional bank loan. If you need capital quickly, you can also explore fast business loans for additional options.
- Collateral counts more than credit: Because the loan is secured by property, hard money loans are accessible even with limited or damaged credit.
Cons
- Higher interest rates: Hard money loan rates typically run from 8% to 18% or more, which can be higher than many traditional business loan options.
- Shorter repayment terms: Repayment terms generally range from six to 24 months, which can strain cash flow if your business is still building revenue.
- Large down payment required: Because lenders cap how much they’ll lend relative to the property’s value, you may need a down payment of 20% to 35% or more to secure the loan.
How to get a hard money business loan
Because hard money lenders aren’t regulated in the same way banks are, requirements vary widely. That said, most lenders follow a similar process.
- Find a hard money lender. Hard money loans aren’t offered by traditional banks, so you’ll need to seek out private lenders or investors who specialize in this type of financing. Good places to start looking include online lending marketplaces, mortgage brokers, real estate agents or attorneys and referrals from other real estate investors in your area.
- Assess your property value. Lenders will appraise your commercial property to determine how much they’re willing to lend. The stronger the property value, the better your borrowing position.
- Prepare your documentation. Requirements vary by lender, but most will want property details, a business plan and a clear repayment strategy. Unlike traditional loans, income verification and credit checks are often minimal.
- Review the loan terms. Compare rates, repayment terms and fees across lenders before committing. Pay close attention to origination fees, which typically run from 1% to 5% of the loan amount, plus any appraisal and closing costs.
- Close the loan. Once approved, hard money loans can close in as little as a few days.
Should you get a hard money business loan?
A hard money business loan can be the right tool in the right situation, but it’s not a fit for most businesses. The high rates, short terms and large down payment requirements make it an expensive form of financing, one that works best when speed and access matter more than cost.
- A hard money loan may make sense if you need funding quickly and own commercial property but don’t meet traditional credit requirements.
- A hard money loan is likely not the right fit if you have time to explore alternatives, need long-term financing or your business is still building revenue.
Alternatives to hard money business loans
Hard money loans are generally a last resort. If other options are available, they’re worth exploring first. Here are some small business financing alternatives with flexible eligibility requirements.
Equipment financing
Businesses needing to purchase or upgrade equipment can often qualify for equipment financing even with limited credit, since the equipment itself acts as collateral. Repayment terms generally range from six to 84 months, giving you more breathing room than a hard money loan. Keep in mind that the lender can seize the equipment if you fail to repay the debt.
Invoice financing
Invoice factoring, also called accounts receivable financing, lets you use unpaid invoices as collateral in exchange for cash. You’ll need a steady stream of invoices to qualify, and fees can add up — though you may pay less overall than you would with a hard money loan.
Business loans for bad credit
Business loans for bad credit are designed for borrowers with limited or damaged credit who need financing without putting up commercial property as collateral. Online lenders tend to have more flexible eligibility requirements than traditional banks, though rates are typically higher to offset the added risk.
Microloans
Microloans are smaller loans of $50,000 or less designed to help business owners start and grow. Women-owned businesses and minority entrepreneurs can often find extra support through microlenders, even with a limited credit profile.
Secured loans
Secured business loans require collateral to back the loan, but unlike hard money loans, lenders accept a wider range of assets including equipment, inventory or unpaid invoices. Because the loan is backed by collateral, secured business loans often come with lower rates and longer repayment terms than unsecured business loans, making them a less expensive alternative for borrowers who have assets to pledge.
Merchant cash advances
A merchant cash advance (MCA) provides a lump sum in exchange for a portion of your business’s future credit and debit card sales. MCA lenders work with low-credit borrowers and don’t require collateral, but this type of financing is expensive, with annual percentage rates often in the triple digits. MCAs are generally best considered after you’ve explored all other options.
If you have time, boosting your credit score and building up your cash reserves can help your business qualify for a more competitive loan.
Frequently asked questions
No, hard money loans are always secured by commercial property. If you need financing without collateral, unsecured business loans are worth exploring.
Yes, hard money loans generally require a large down payment of 25% or more. If you’re a startup with no money, you may want to look into other options, such as small business grants or crowdfunding for businesses.
In general, there is no minimum credit score needed for hard money loans. This is because hard money lenders rely on your commercial property value, not your personal or business’s financial profile. While some lenders may run a credit check, some don’t even consider your score or business tax returns during the underwriting process.
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