Commercial hard money loans are a short-term loan product that real estate developers and businesses in need of quick access to capital use. Commercial hard money loans differ from conventional bank loans, which are based upon a platform of extensive documentation and good credit. Commercial hard money loans are based instead on the property value that is being used as collateral. Commercial hard money lenders are generally private lenders, so the loans are appealing to borrowers who will not qualify for traditional financing.
Hard money loans are typically used for fix-and-flip projects, bridge loans, and time-sensitive real estate investing. Due to their higher rates and shorter term, they are most appropriately used by borrowers as short-term financing. The lenders focus more on the property’s value instead of the creditworthiness of the borrower, thus making the loans suitable for borrowers with imperfect credit.
Major Benefits of Business Hard Money Loans
The best benefit of California business hard money loans is quite possibly their timing. It may take weeks or even months to close a traditional bank loan, but hard money loans can be closed in days. That renders them the ideal option for investors who must move quickly on an investment.
One benefit is the lenient approval requirements. Because the property serves as collateral for the loan, the lenders are less concerned about the creditworthiness or financial health of the borrower. This provides an opportunity for investors and businesses that might otherwise not qualify for conventional financing.
Hard money loans also feature shorter loan durations, typically six months to a few years. Although this translates to larger monthly payments, it allows borrowers to complete projects and pay off the loan within a short duration without being tied into long-term financing. The ability to borrow based on property value rather than financials can be a game changer for businesses that need immediate capital. Key benefits of California commercial hard money loans:
- Fast approval process – Loans can be approved within days, unlike traditional loans that take weeks or months.
- Flexible qualification criteria – Lenders focus on property value rather than credit history.
- Shorter loan terms – Borrowers can complete projects and repay loans quickly.
- Asset-based lending – The loan is secured by property, making it ideal for businesses needing fast capital.
- Ideal for real estate investors – Perfect for fix-and-flip projects, bridge financing, and other commercial ventures.
The Risks and Costs of Hard Money Loans
Though the hard money loans are quick and flexible, they are costly and risky. The largest drawback is the high interest rate. Since the loans are risky, additional interest than the conventional banks is charged, typically between 8% to 15% or higher.
Another disadvantage is the short term of repayment. The loan needs to be paid back by the borrowers in a relatively short timeframe, which will be financially taxing for companies in case their investment strategy does not materialize as expected. Banks may also make charges of origination fees, appraisal fees, and other associated fees, which can escalate extremely quickly.
Such dangers are easily in excess in California’s white-hot commercial real estate market. Shifts in property values and even in market conditions, and exit strategies are affected as a consequence. Investors in markets like San Diego and Los Angeles must study the trends of markets carefully before closing a hard money loan.
Borrowers must also consider foreclosure risk. Since the loans are collateralized by real property, default can result in loss of property. Businesses must have a good plan for exiting before they commit to a hard money loan to limit losses.
How to Qualify for a Commercial Hard Money Loan
It is not nearly so difficult to qualify for a hard money loan as for a regular loan but remains riddled with demands for the lenders to locate property value. Number one is the value of the collateral property. The lender will lend in the form of a percentage of the value of the property, or LTV ratio. Typical hard money lenders will lend for 65%–75% of appraised value of the property.
In California’s blazing hot commercial real estate market, lenders would rather have a solid application in hand. Property prices will naturally be high, and lenders may become a little more cautious with LTV ratios. And location, location, location are the watchwords when it comes to obtaining a loan. Buildings in blazing hot markets such as Los Angeles or San Francisco will receive better financing. Borrowers will also be required to demonstrate a clear investment proposal, as lenders would want to ensure that the loan is repayable on schedule.
Credit history will be secondary in value, and a moderate level of financial strength will be beneficial. Some lenders will require proof of income or assets to be available for ascertaining if one can afford to repay the loan. Private lenders, in certain cases, will also consider the viability of the project, especially for commercial projects on a large scale.
Borrowers will also need a good loan repayment plan. Either through refinancing, sale of the subject property, or through business proceeds, a good repayment plan will raise chances for loan approval. Borrower’s experience in real estate investment, particularly in fix-and-flip activities, is also what other lenders will consider.
