Modern society is quick to label things. And once a label is applied, it is equally quick to make judgments based solely on it. That’s why so many people have a bad perception of hard money lending. It is often labeled as being risky, expensive, or an option of last resort. But all those labels ignore the fact that hard money loans have value.
Hard money loans are made by private lenders rather than financial institutions. They are sometimes referred to as bridge loans and rescue capital. But again, regardless of what you might call them, hard money loans are valuable. They offer borrowers a legitimate alternative to traditional financing.
Why People Borrow Hard Money
Labels lead consumers to believe that only the most desperate borrowers whose poor credit and lack of income prevent them from getting conventional loans apply for hard money. Nothing could be further from the truth. Hard money lenders are not masochists. They are not looking to lend to highly risky borrowers because they want to lose their shirts. The whole notion is just absurd.
People borrow hard money because their needs do not fit into the conventional financial institution box. Take the real estate investor. At Actium Partners in Salt Lake City, UT, real estate investors make up the bulk of their client base.
Banks are hesitant to get into commercial real estate deals to begin with. They bristle even more at investment deals. Meanwhile, real estate investors have solid financial backgrounds. They are successful business professionals who make money on property. The only reason they struggle to get bank loans is because their investment activity doesn’t conform to rigid bank standards.
Hard Money Isn’t So Rigid
Hard money is not nearly as rigid as bank money. Private lenders can be a lot more flexible about what they land, their purposes for lending, their rates and terms, and so on. They have the ability to structure hard money loans to the exact needs of each borrower. Meanwhile, banks need to stick with a black-and-white formula.
Income is the perfect example here. A bank wants to see tax records and pay stubs to verify a borrower’s income. The problem for investors is that they don’t have 9-to-5 jobs. They do not get weekly paychecks. They get paid via the returns on their investments. Their ‘income’ is classified as capital gains that cannot be verified with a W-2 form or monthly banking statements.
In short, real estate investors can’t prove income in a way that satisfies banks. That is why they struggle to get conventional loans. Hard money lenders work differently. They base approval decisions on borrower assets. If an asset offered as collateral has enough value to cover the loan, everything is good.
A Valuable and Much-Needed Option
Despite so many people thinking that hard money loans are only for desperate people whose finances are too messed up to get conventional loans, hard money represents a valuable and much-needed option for people whose circumstances do not fit inflexible bank criteria.
Hard money borrowers can get loans when banks say they aren’t interested. But above and beyond that, they can also get approved and funded extremely quickly. Banks can take months to approve and fund. A typical hard money lender does the same thing in a matter of days.
You can call hard money whatever you want. At the end of the day, it is a legitimate and valuable alternative to institutional lending. It offers so much value to certain types of financial needs that it is often the lending option of choice among repeat borrowers.