A commercial hard money loan is a non-conventional commercial real estate loan that is NOT made by a traditional bank. This type of commercial financing has been in use for over 50 years. Such loans usually have a first lien on commercial property. If a hard money loan has a secondary lien, it is known as mezzanine financing.
Commercial hard money loans are typically completed more quickly than a traditional commercial loan. The primary rationale for a small business considering a commercial hard money loan is that traditional commercial financing options are not viable. There are three financing options for most commercial real estate scenarios: traditional banks, intermediate lenders and hard money lenders.
In those situations where traditional banks and intermediate lenders both say “NO”, it then makes good business sense to explore under what terms a hard money commercial loan might be available. Many viable small business projects can be funded ONLY via a hard money lender. Before accepting “NO” from the traditional banks and intermediate lenders as the “FINAL ANSWER”, a prudent small business borrower should determine if a hard money lender will say “YES”.
Compared to traditional bank business loans, commercial hard money loans will generally involve a higher interest rate (prevailing range of prime rate plus 4-8% for typical scenarios), higher fees and shorter-term financing (one to three years). However, because many hard money loans offer interest only terms, the payments can be lower than a fully-amortized loan with a lower interest rate.
Several common commercial financing scenarios using hard money loans are described below.
Scenario # 1: Low Credit Scores
Most traditional commercial loans have very strict standards for acceptable credit scores by the guarantors for a commercial real estate loan. Hard money loans are much more flexible and low credit scores are acceptable.
Scenario # 2: Need to Obtain Commercial Financing Quickly
Traditional commercial loans will normally require several months to complete. Hard money loans can be obtained within a few days in some situations. This difference will be critical if commercial financing is required within a short time frame.
Scenario # 3: Aggressive Loan-to-Value Ratios (including construction)
If commercial borrowers want to purchase, refinance or build a commercial property using a higher loan-to-value (LTV) than permitted with a traditional commercial real estate loan, a hard money loan should be considered. In some cases up to 100% acquisition financing can be arranged.
Scenario # 4: Special Small Business Situations Not Easily Understood by Traditional Banks
Special Purpose Properties
Negative Net Worth
Less than one year in business