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Commercial Hard Money Loan Scenarios

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 loan has a secondary lien, it is known as mezzanine financing.

Three Business Mortgage Loan Choices

There are three financing options for most commercial real estate scenarios: traditional banks, intermediate lenders and hard money lenders. The primary rationale for a small business considering a commercial hard money loan is that traditional or intermediate commercial financing options are not viable.

In those situations where traditional banks and intermediate lenders both say “No,” it then makes good business sense to explore under what terms an alternative 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 another lender will say “Yes.”

Commercial hard money loans are typically completed more quickly than a traditional commercial loan. Compared to traditional bank business loans, this alternative financing will generally involve a higher interest rate (prevailing range of prime rate plus 4-8 percent for typical scenarios), higher fees and shorter-term financing (one to three years). However, because many of these loans offer interest only terms, the payments can be lower than a fully-amortized loan with a lower interest rate.

Funding Scenarios

Three common commercial financing scenarios using alternative 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. Alternative loans are more flexible and low credit scores are often acceptable.

Scenario # 2: Need to Obtain Commercial Financing Quickly

Traditional business financing will normally require several months to complete. A hard money loan 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: Special Small Business Situations Not Easily Understood by Traditional Banks and Intermediate Lenders

  • Foreclosure
  • Bankruptcy
  • Special Purpose Properties
  • Tax Liens
  • Business Losses
  • Negative Net Worth
  • Less than one year in business
  • Environmental Requirements

For each of the three scenarios described above, an alternative source for a commercial loan will involve shorter-term financing, higher fees and higher interest rates than a commercial mortgage from a traditional bank or an intermediate lender. However, the critical point which must not be overlooked is that for most situations covered by the three scenarios, commercial financing would be declined by either traditional banks or intermediate lenders. It is under these circumstances that a hard money loan becomes a practical and viable solution for many small business owners.

What If the Bank Says No?

The primary rationale for business borrowers to consider other sources for funding is the lack of alternative funding strategies. In most cases hard money loans can be viewed as “Plan B.” However, if “Plan A” is to obtain a conventional bank mortgage and the bank says “No,” then “Plan B” must be reviewed and considered by commercial borrowers.

Commercial Real Estate – Hard, Hard, Hard Money Loans

Financing for commercial real estate is a completely different game when compared to residential mortgage loans. It moves much faster and is much more flexible.

Commercial Real Estate – Hard, Hard, Hard Money Loans

When purchasing commercial real estate, financing is the most significant factor in determining whether the project is worth pursuing. Although there are a variety of commercial real estate loans on the market, we are going to look at hard money loans in this article.

Hard money loans for commercial real estate are often a matter of last resort. They aren’t good deals, but they can save a financing situation that has gone critical. Most hard money loans come with significant upfront costs and astronomical interest rates. When you are facing the prospect of losing a commercial property, however, they can be a godsend because they also are granted very quickly.

Hard money loans are considered very risky and are issued by private financing groups, not banks or lenders. The loans tend to be only available as the primary loan on the property, which isn’t that rare a situation in commercial property.

Unlike home loans, hard money loans are all about the potential sales price of a piece of commercial real estate. The party considering lending you money is not going to look at the appraised value of the property. They are going to look at the probably sales price if the commercial real estate has to be sold a few months after making the loan. Depending on the condition of the property, this figure will typically be between 50 and 75 percent of the appraised valued of the commercial property.

Put another way, a hard money loan is a short-term loan designed to get you past an immediate problem. It is undeniably a loan of last resort and is not an ultimate solution to a financing problem with a commercial property. It does nothing other than buy you time, and at a fairly hefty cost. If you are in a tight spot and can resolve the problem with a few extra months time, a hard money loan may be the answer.