Hard Money Commercial Loans

While customers with hard money commercial loans focus on timing and opportunity, lenders who provide funds for such ventures have many different ways to turn a profit. Clients turn to these loans for a variety of reasons. Like other recipients of hard money funds, they may have a problem credit situation which is not attractive to either banks or sub-prime mortgage lenders. However, commercial clients are more likely to have problems with the sheer amount of money which is required to successfully run a commercial venture. These borrowers may need to act quickly in order to take advantage of a business opportunity which will not be available if traditional lending processes are employed.

Unlike participants in regular mortgage agreements, applicants for hard money commercial loans are not as strictly bound by their personal financial situation. Lenders focus instead upon the value of the property which will secure the loan. If the borrower is unable to fulfill their end of the bargain, the lender is soon able to begin foreclosure proceedings. The property may then be sold to recoup the lender's losses. Therefore, the application process may not be as lengthy as that required by regular loans. Also, the purveyor of such funds tends to be willing to take more of a risk in extending credit to his or her customers. Therefore, there is more flexibility in the types of financing programs which may be offered.

Four general types of scenarios seem to dominate the hard money commercial loans arena. Acquisition of property for commercial use, along with construction funding to renovate the property for commercial purposes is one common area where a loan may be required. Few individuals have the money or credit situation which enables them to make such purchases or improvements on their own. Another area is debt and equity financing, which is available for those in difficult financial situations. Short term bridge loans are another form which hard money commercial loans may take. These loans enable the customer to move ahead while waiting for his or her primary funding to be established. There are also loans which may aid in rescuing a floundering project until it can stand on its own feet financially, or at least buy some time in order to keep investors from experiencing a total loss if the property must be resold.

The rates and programs for hard money commercial loans depend on the type of property, the terms of the loan and the borrower's general financial situation. Commercial loan projects may include money for acquiring or improving land. Construction projects, retail space or office parks, warehouses or self-storage businesses may be the result of such funding. Monies may also be provided for restaurants, hotels and condo conversions. Sometimes projects with mixed commercial and residential use are included. Unique properties for special use may get funding which would not normally be available from regular lenders who may be bound by stricter lending guidelines or regulations.

However, the freedom to dispense funds more readily comes with a price, quite literally. Interest rates will be quite a bit higher than those imposed by traditional lenders. Additional points may also be imposed upon the borrower. These terms are not surprising, given the amount of risk that these lenders take upon themselves. Some borrowers are all too willing to put up with the additional costs in order to remain solvent or to accomplish needed expansion for a growing business. Lenders who provide hard money commercial loans are generally able to be more flexible in making payment arrangements and offering options to borrowers who are in difficult situations. This is because they usually have a significant amount of funds from private investors already assembled, and also have the means to service their loans themselves, which increases their profit margins.

It is no doubt in the lender's best interest to continue a relationship with the borrower rather than seek foreclosure proceedings. This way they do not have to go through the time and expense involved in foreclosure proceedings or reselling the property. Either way, lenders would probably make a profit when setting up the hard money commercial loans. This is because they are careful to arrange the loan to value ratios so that a profit can be made even if the property must be foreclosed.

The terms of hard money commercial loans are usually short. A one-year loan is common, although loans up to three years are not unusual. On the other end of the contract, watch out for exit fees, which are sometimes imposed even if the loan terms have been faithfully completed. Prepayment penalties may be stipulated for those who want to repay the loan earlier than required. Before entering into a loan agreement, be sure to read the terms of the loan carefully and ask for clarification on any matters which raise questions. Another pitfall to avoid is the extremely large fee which may be imposed on those who are late on their balloon payments. Since a great number of borrowers fall into this category, it is necessary for the borrower to carefully consider whether he or she will realistically be able to make the larger payments when the time comes. Do not be presumptuous by assuming that the future will bring only increased financial means to repay debts. As James 4:13-15 states, "Go to now, ye that say, To day or to morrow we will go into such a city, and continue there a year, and buy and sell, and get gain: Whereas ye know not what shall be on the morrow. For what is your life? It is even a vapour, that appeareth for a little time, and then vanisheth away. For that ye ought to say, If the Lord will, we shall live, and do this or that." A sense of humility and dependence upon the Lord will bear interest in quiet confidence in His ability to provide for all needs, whether they be physical or spiritual.

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