Hard 

Hard money loans are a type of asset-based financing through which your borrower receives funds secured by a commercial property, generally at a high interest rate. 

These loans are typically interest-only products and tend to be short-term solutions — one or two years — with a balloon payment at the end.

Borrowers requiring a hard money loan often have experienced a distressed financial situation, such as a bankruptcy or foreclosure, which has damaged their credit. 

Interest rates are usually at least 12 percent and can often be much higher because lenders are taking on more risk with a hard money borrower’s situation. 

The other costs of a hard money loan also tend to be higher, with lenders charging as much as 10 percent to close the deal. Hard money loans aren’t cheap, but they do fill a void in the small-balance commercial mortgage market. 

So, it’s important to be able to recognize a borrower who will only qualify for this type of deal and to select the right hard money lender. If your borrower’s credit scores are particularly low, a hard money loan might be the only option. Hard money loans can be a way for borrowers in financial trouble to obtain the funds they need while reestablishing a positive payment history. 

As a broker, it’s important to encourage your borrowers to make their payments on time and to keep records of these payments, since most hard money lenders don’t report them to the credit bureaus. Seasoning issues also can keep a borrower from qualifying for a mortgage from a bank or some private lenders. 

Generally speaking, if your borrower has owned a commercial property for less than two years, the individual will run into issues with seasoning. 

In this case, a hard money loan could be the right solution as these types of lenders usually don’t have seasoning requirements. Many borrowers don’t want hard money loans, which require a fast exit strategy as the loans tend to balloon within two years. 

Borrowers who need a bridge loan and are planning to sell their property to pay it off also are potential candidates for hard money financing. 

Bank loans and some private-money mortgages are usually longer-term loans with prepayment penalties, so a hard money loan that can be paid off quickly without incurring additional fees is your borrower’s best bet in this situation.

Another case in which your commercial borrower may need a hard money loan is for a purchase-and-rehab property. Few banks are willing to provide financing to borrowers looking to rehabilitate small commercial properties, and even many nonconforming lenders shy away from these situations. 

If your borrower is looking to purchase a commercial property with the intent to fix it up and sell it, a hard money lender is going to be a good source for obtaining the necessary funds.

Finally, for some borrowers who need a commercial mortgage in a very short time frame, waiting for a bank loan to close simply isn’t an option. 

Commercial hard money lenders are known for closing deals quickly and, in the right situation, a borrower will think it’s worth the extra costs.

Hard money loans are a great option for some commercial borrowers. 

There are other options, however, for small-business owners who cannot qualify for bank loans but are looking for something relatively inexpensive and stable. 

For the borrower between a bank and a hard money place, there’s another option.

Pursuing the alternative

Nonconforming commercial lenders like Capital Zone Investment Pro have rates and terms in between those of banks and hard money lenders and are a great option for many small-business owners looking to refinance or purchase a property. 

This niche is still relatively underserved, and fewer who are willing to work with nonbankable borrowers and their commercial mortgage brokers to create long-term financing solutions that benefit all parties involved.

So, how can you tell if a borrower can qualify for alternative financing that isn’t hard money? Your borrower’s credit history is going to be an important factor but not the end all be all.

If you’re working with a borrower whose scores disqualify them for a bank loan, but they aren’t necessarily low enough to necessitate hard money financing, your borrower could obtain an alternative nonconforming commercial mortgage. 

It’s also important to note why their scores are too low for bank financing. If your borrower has recent late mortgage payments, they’ll likely only be able to obtain a hard money loan. Credit issues stemming from medical emergencies or financial problems unrelated to their business, however, are obstacles that some nonconforming lenders can work with.

If your borrower is looking for long-term financing, a nonconforming commercial mortgage with the right lender is a great choice. Many borrowers don’t want hard money loans, which require a fast exit strategy as the loans tend to balloon within two years. 

For borrowers seeking a more secure and consistent financing option, an alternative small-balance commercial mortgage could be a good solution. VII Capital Funds offers a few ways to accomplish this task. 

Landgraf, Emily. “Don't Fret Over a Bank-Loan Turndown.” Scotsman Guide, Scotsman Guide, www.scotsmanguide.com/Commercial/Articles/2018/01/Don-t-Fret-Over-a-Bank-Loan-Turndown/.