“Hard” Money Lending Myths
For some, the phrase “hard money lender” connotes visions of lenders who prey on the financially weak, impose oppressive loan terms and charge obscenely high interest rates. These connotations and stereotypes can’t be further from the truth. The reality is that most hard money lenders are professional, experienced lenders who can offer financial solutions for business borrowers to whom big commercial banks won’t lend. Whether it’s because you’re being told that your bank won’t lend to you due to the nature of your business, or because your business hit a rough patch, a business loan through a hard money lender is worth exploring. While there are differences between loans from hard money lenders—or private lenders as we prefer to call ourselves-- and traditional banks, many of those differences may make it easier to secure the capital your business needs. Hard money lenders make loans based on the value of real estate owned by the borrower. The Lending decisions are generally based on the quality of a borrower’s real estate and whether the lender can secure a first position mortgage against the property and not the borrower’s credit score. Credit-worthiness is considered when setting the interest rate for the loan. This key difference may qualify many commercial borrowers for a loan in circumstances where traditional commercial banks won’t lend. Hard money lenders also use lower loan-to value ratios (LTV) in offering loans. While traditional banks may offer a loan with 80% LTV, many hard money lenders will typically offer loans with an LTV in the 30% to 50% range. The hard money lender may also appraise the value of your property more conservatively than a bank. How does this translate? Let’s use a possible scenario at Singer Financial Corp. as an example. We will typically loan up to 40% of the value of the property. If you have a property valued at $1,000,000.00, Singer Financial may offer to lend you $400,000.00, while a commercial bank may offer to lend you $800,000.00 if you otherwise qualify with them based on your credit score, type of business, and are issue-free.While interest rates charged by hard money lenders are higher than traditional banks, the rates are based on the higher cost of capital. Commercial banks borrow their money from the Federal Reserve at the “discount” rate (2.0% as of the date of this article). Hard money lenders do not get cheap money through the Federal Reserve. Most hard money lenders get their money from private investors to whom they pay higher rates of interest. This is primarily why rates charged by private lenders are higher than banks.Despite the stereotypes, interest rates charged by most hard money lenders are a lot less expensive than you may think. For example, we offer loans with rates as low as 11% to 15% at Singer Financial Corp. Today’s hard money lenders offer a valuable service to many businesses who have real assets, but for a variety of other reasons can’t get the money they need from the big banks. Singer Financial Corp. is a private commercial lender with over 25 years of lending experience. If you are looking for capital for your business, and having trouble securing it from a traditional bank, give us a call. We may be able to offer a solution. John Licari is the assistant to Paul Singer of Singer Financial Corp. located in Philadelphia, PA.