Last Updated on February 10, 2024 by Gerry Stewart
Hard money commercial lending has become an increasingly popular financing option for real estate investors, business owners, and other borrowers needing quick access to capital outside of traditional lending channels.
This specialized form of financing fills an important niche, providing expedited funding that can make or break time-sensitive acquisitions and deals.
As demand grows in lockstep with stricter bank lending standards in recent years, more lenders are entering the commercial hard money space.
But navigating this complex landscape requires in-depth knowledge. This guide breaks down everything you need to know about obtaining hard money loans for commercial real estate or business capital needs.
Key Takeaways on Hard Money Commercial Loans
- Hard money fills specialized real estate financing needs for time-sensitive deals.
- Loan approval hinges on asset values rather than credit scores or financials.
- The trade-off for expedited funding is substantially higher costs.
- Shorter terms necessitate exit strategies to pay off loans.
- Proper underwriting and cautious use provide benefits beyond traditional lending.
- Careful lender vetting ensures the selection of experienced, trustworthy partners.
- Expanded alternative funding sources increase capital sources.
- Hard money allows capitalizing on opportunities otherwise unavailable.
What Is Hard Money Commercial Lending?
Hard money loans are a type of asset-backed financing collateralized by real estate. The “hard” refers to the asset itself instead of the person borrowing the money.
- Collateral-based: Loan approval is based on the value of the collateral (real estate), not personal credit.
- Higher interest rates: Generally 2-3x higher than bank rates to offset the increased risk.
- Shorter terms: Typically 12 months or less. Borrowers need to refinance or sell quickly.
- Faster funding: Money can be secured in as little as 1 week as opposed to 1-3 months with banks.
- Fewer limits on use: Funds can be used for commercial real estate purchase/refinance, renovations, operating capital, etc.
- Flexible qualifying: Alternative lenders look beyond credit scores and financials.
Hard money is ideal for borrowers who need funds quickly, have less-than-perfect credit, or require financing for non-traditional properties that don’t conform to agency guidelines. The higher costs provide access to capital otherwise unavailable.
Types of Commercial Hard Money Loans
Many types of hard money loans cater to business purposes:
Bridge Loans – Used to close quickly on a property before arranging longer-term financing. This allows the borrower to act fast on time-sensitive deals.
Rehab Loans – For financing property renovations to add value. Hard money covers costs banks won’t fund until improvements are complete.
Ground Up Construction – Build on vacant land or tear down and rebuild. Hard money finances in early stages that banks deem too risky.
Business Cash Out – Pull equity out of commercial property to fund equipment purchases, expansions, debt consolidation, operating expenses, etc.
Partner Buyout Loans – Buy out a partner’s share of a property or business when funds need to be mobilized quickly.
Foreclosure Purchase Loans – Acquire distressed properties at auction quickly with hard money financing.
Commercial Refinancing – Hard money can provide debt relief by replacing high-interest loans with lower monthly payments.
The fast access to capital makes hard money well suited to taking advantage of time-sensitive opportunities that have a built-in exit strategy. The short-term, high-cost nature necessitates a specific plan to pay off the loan.
Commercial Hard Money Loan Process
Securing a commercial hard money loan involves a streamlined underwriting process focused on the real estate collateral. Here are the typical steps:
1. Application – Borrowers provide basic personal/business info, property details, loan amount sought, and intended use of funds.
2. Collateral Evaluation – Lenders order a third-party appraisal to ascertain property value and lend at a loan-to-value ratio (LTV) below 100% to protect their investment. For a construction loan, lenders determine the after-repaired value (ARV).
3. Borrower Review – Analysis of borrower/sponsor capability examines credit reports, financials, experience with similar projects, and materials like rent rolls, licenses, CVs, etc.
4. Term Sheet Issuance – Once initial underwriting is complete, the lender provides an unofficial term sheet detailing proposed terms prior to incurring full underwriting costs.
5. Due Diligence – If satisfied with the terms, the borrower pays for third-party reports (appraisal, environmental) and a deposit for the lender to undertake full underwriting.
6. Formal Commitment Letter – Upon final approval, the lender issues a formal commitment letter detailing final loan terms.
7. Closing and Funding – The borrower meets any prior-to-funding contingencies, signs loan docs, and receives the funds, often within 5-10 days of commitment.
Instead of relying chiefly on financials and credit scores, hard money lenders focus on the real estate asset itself and the borrower’s ability to successfully execute the business plan.
Commercial Hard Money Loan Underwriting Criteria
These key factors determine approval and pricing:
- Collateral – More than credit or financials, property value is the predominant factor. Most lenders lend at 65-80% LTV for strength of position.
- Experience – Commercial lending is relationship-based. Having successfully completed similar projects is key.
- Credit – Credit scores and reports are reviewed but are secondary. Lenders look for bankruptcies, defaults, or overall irresponsible behavior.
- Exit strategy – A plausible and executable plan to repay the loan through refinancing or sale within a short timeframe is essential.
- Cash and liquidity – Adequate cash reserves to cover cost overruns or delays boost an application.
By focusing on these variables versus financial ratios or FICO scores, alternative lenders are able to provide financing for strong projects that fall outside agency guidelines. Their due diligence centers on mitigating risk through asset analysis.
Costs of Commercial Hard Money Loans
The main trade-off for ease of approval and expedited timing is higher costs:
- Interest rates – Typically 11-15%, with some lenders charging upwards of 15%.
- Origination fees – 1-5 points of the loan amount. Covers underwriting costs.
- Other fees – Application fee, document prep fees, inspection fees, etc. Usually 1-2% combined.
- Prepayment penalties – Some lenders charge fees if paying off the loan before maturity.
To determine true costs, look at annual percentage rates (APR), which reflect total interest and fees relative to the loan amount and term. The short duration offsets higher rates.
Benefits of Commercial Hard Money Loans
Despite the higher price tag, hard money loans provide distinct advantages:
Quick Closing Times
The streamlined underwriting facilitates loan decisions in days as opposed to months. For deals with defined deadlines, hard money can provide the speed needed to secure the transaction.
Funding for Non-Conforming Properties
Properties that don’t meet agency lending standards can obtain hard money where they wouldn’t qualify for bank financing.
Flexible Use of Funds
Hard money lenders allow the widest latitude of use, including operating expenses, renovations, equity buyouts, or operating losses that banks deem too risky to fund against collateral.
Bad Credit Accommodation
For borrowers with past credit mishaps, hard money provides financing based on their project merits versus past repayment history.
The trade-offs require careful analysis, but businesses that leverage hard money’s advantages can prosper. Lenders have a niche role in helping projects succeed.
Risks and Downsides of Hard Money Loans
Despite their benefits, commercial hard money loans have risks to weigh:
Expense – The overall cost with rates and fees is higher than conventional financing.
Liquidity – Most properties cannot be readily sold within the short loan term if capital is needed.
Refinancing – Loans need to be paid back or refinanced quickly, often with future financing uncertain.
Prepayment Penalties – Exit fees to pay off loans early further increase costs.
Collateral Risk – Inability to repay may result in loss of the property securing the loan.
Personal Guarantees – Most hard money loans require personal liability from borrowers beyond just the property.
The right opportunities can justify higher expenses and risks, but borrowers should carefully assess if the benefits outweigh the total costs before obtaining this type of financing.
Vetting and Choosing Commercial Hard Money Lenders
With the rapid growth of alternative lending, more hard money lenders are pursuing the commercial space. But not all are created equal. You’ll want to carefully vet potential partners.
Factors to Consider
- Experience – Seasoned lenders with years specifically in commercial lending who understand the nuances.
- Funding capabilities – Balance sheet size and fundraising ability to deliver on large loans. Look for $50 million+ in lending capital.
- Loan terms – There is a variety of term lengths, amortization schedules, and interest-only options.
- Rates and fees – Don’t sacrifice quality for cost, but understand overall APR.
- Loan-to-value limits – Conservative LTVs around 70% indicate prudent underwriting.
- Track record – Evidence of successfully completed projects without defaults or foreclosures
Evaluating Commercial Hard Money Lenders
The due diligence process mirrors the lender’s own underwriting. You’re determining if this partner can deliver on their promises.
- Research experience – How long have they been in business? How many commercial loans have they funded in your state?
- Verify licenses – Ensure the company and loan originators have current licenses.
- Check litigation history – Search court records for any lawsuits against the lender.
- Confirm funding capacity – Ask about current lending capital and borrowing capacity to assess the ability to fund.
- Request referrals – Speaking with past clients provides insight into processes, responsiveness, and integrity.
- Compare loan terms – Understand the APR metric and how proposed terms compare to competitors.
- Read the fine print – Review loan documents, fee structure, and prepayment terms for any red flags.
Thorough vetting is critical to avoid lenders overpromising or having different priorities. Take time to confirm alignment with a lender who proves themselves a trusted partner.
I once helped a construction company that needed hard money construction loans to complete their projects. They had a poor credit history and could not qualify for traditional financing solutions. I introduced them to the bridge loan marketplace, where they could find asset-based lending options from private investors.
We compared different lenders based on their lending focus, lending criteria, and interest rates.
We also used Quickbooks to prepare their financial statements and cash flow projections. After reviewing several offers, we chose the best one for their needs and secured a commercial mortgage for their properties.
The company was able to finish their projects on time and repay the loan with the profits. They were very happy with the outcome and thanked me for my assistance.
If you are looking for hard money commercial lending for your business, I can help you find the best alternative financing for your situation. Contact me today at (888) 653-0124 and let’s discuss your options.
Negotiating The Best Commercial Hard Money Loan Terms
Once satisfied with the lender’s choice, you can negotiate for the most favorable loan terms possible. Some areas to focus on:
Interest Rate – Rates range widely from the high single digits to mid-teens. Comparison shop for the best APR.
Points – Try to reduce origination fees to 1-2 points through improved collateral or longtime relationship.
LTV – Ask for the maximum LTV the lender will permit based on your asset strength and track record.
Prepayment Terms – Request greater flexibility to pay off early with lower or no penalties.
Loan Term – Push for longer terms like 18-24 months to allow more flexible hold periods.
Extension Options – Having the option to extend 6-12 months can be vital if any hiccups occur.
Recourse – Seek non-recourse loans that isolate default exposure to just the property if possible.
The most favorable terms go to the least risky deals led by experienced sponsors.
Put yourself in the best position through thoughtful planning and transparent communication.
Finding The Money: Alternative Commercial Lending Solutions
Beyond traditional hard money loans, expanded options now provide more creative capital solutions:
Crowdfunding / Peer-to-Peer Lending
Online platforms allow investors to fund loans. This increases competition, which may lower rates.
A “second mortgage” supplements a senior loan to provide additional funding at a higher cost and with equity participation.
Investors receive preferred payments from property cash flow as well as a share of appreciation over time in exchange for funding.
Partnering with high net-worth investors or family offices can provide equity for larger or more complex projects.
Some sellers may become the lender and carry financing for future payoffs. This can secure deals with attractive terms.
Opportunity Zone Funds
Investors receive tax benefits for funding development in certain designated geographic areas.
Today’s marketplace offers more options than ever to secure commercial financing creatively. The wider menu of instruments allows for structuring capital stacks specific to each deal.
Optimizing the Hard Money Loan Process
Beyond securing favorable terms, certain strategies can help maximize the loan experience:
Getting realistic collateral valuations protects against surprises later. Hire experienced commercial appraisers even if cost more upfront.
Don’t leverage properties to the hilt. Leave equity buffers as safety margins. This also provides flexibility if values change.
Cost Overrun Reserves
Budget 10-20% contingencies for unforeseen expenses. Having reserves enhances loan performance.
Know the Exit Strategy
Even before securing the loan, ensure a feasible plan exists to either sell or refinance based on realistic assumptions. Waiting until the loan matures to start strategizing is a recipe for failure.
Keep lenders and partners informed about material changes in timelines, budget variances, etc. Transparency and collaboration align interests and unlocks flexibility when issues arise.
Assemble the Right Team
Surround yourself with experienced legal counsel, appraisers, brokers, contractors, and other specialists. Paying more for quality prevents headaches later.
Successfully managing the intricacies of the hard money process takes discipline and organization. Staying on top of details helps projects proceed smoothly and profitably.
The Future of Commercial Hard Money Lending
Powerful trends are reshaping commercial hard money lending:
More banks, hedge funds, REITs, and other large financial entities provide scale capital in the space previously dominated by private lenders.
New software increases loan workflow automation, speeds underwriting using AI tools, and improves borrower experiences.
Distributed ledger technology enhances transaction security and integrity. Smart contracts automate loan servicing and disbursements.
Blurred Lines Between Lenders
Alternative and traditional lenders increasingly offer blended products incorporating elements of each other’s models.
Focus on Customer Experience
Heightened competition compels lenders to improve the overall borrower journey beyond just cost and funding speed.
Evolving Alternative Funding Sources
Expanded choices like crowdfunding broaden capital availability. Deal structures incorporate creative combinations of debt and equity.
While still a specialized sector, hard money moves toward the financial mainstream. This expands options for borrowers while reshaping industry practices.
|The hard money commercial lending market is expected to reach $35.8 billion by 2027, growing at a CAGR of 17.1% from 2022 to 2027.
|Rising interest rates and tightened lending standards by traditional banks are driving demand for alternative financing options like hard money loans.
|Focus on Specific Sectors:
|Hard money lenders are increasingly catering to specific sectors such as construction, real estate, and e-commerce, where traditional financing might be harder to obtain.
|Many hard money lenders are adopting fintech solutions to streamline the loan application process, improve underwriting, and offer faster funding times.
|The increasing number of hard money lenders entering the market is leading to more competitive rates and terms for borrowers.
|Focus on Data-Driven Underwriting:
|Hard money lenders are increasingly using data-driven analytics to assess loan risk and personalize loan terms, making them more flexible than traditional lenders.
|Rise of Short-Term Lending:
|Short-term, bridge loans are becoming popular to finance property acquisition, renovation projects, and working capital needs.
|To address concerns about predatory lending, many hard money lenders are emphasizing transparency in fees and loan terms.
Is Hard Money Right for Your Next Commercial Project?
Hard money fills a profitable niche helping qualified borrowers act quickly to capitalize on time-bound opportunities and non-conforming properties. For the right deals, the benefits outweigh the costs. Assessing your readiness involves answering a few key questions:
- Do you fully understand the higher expenses and risks involved?
- Do you have experience executing similar successful projects in the past?
- Do current market conditions and assumptions pencil in your business plan?
- Is your project time-sensitive with specific deadlines or competitive pressures?
- Does the property or request fit outside conventional credit standards?
- Do you have proper professional support and adequate cost reserves?
If you can confidently answer yes to these questions, hard money financing may offer the ideal solution to propel your next commercial endeavor forward.
Hard money commercial lending carries greater risks and expenses than conventional financing but enables borrowers to act quickly to acquire and enhance properties while leveraging their expertise. For the informed borrower able to put its advantages to work creatively, hard money unlocks funding opportunities that help deals succeed.
Don’t Let Financing Hurdles Hold You Back! Reach out to (888) 653-0124 for Expert Advice.
Hard Money Commercial Lending Quiz
Hard Money Commercial Lending Survey
We want to learn more about your experiences and thoughts on hard money commercial lending. Your feedback will help us improve our services.
Question 1: Have you ever obtained a hard money commercial loan?
Question 2: If yes, what loan purpose did you use it for?
- Property purchase
- Property rehab/improvements
- New construction
- Business capital/expenses
Question 3: How would you rate your overall experience?