When it comes to lending, for a lot of us the financial institutions in the country are the only options that come to our mind. These include conventional banks and other financial institutions like leasing companies who have the approval from the right authority in the country to give out financial loans to companies and individuals.
However, these are not the only options that you can exercise if you are facing a financial crunch Or you wish to acquire funds in order to build up any investment or an asset.
What is hard money lending?
Many investors and individuals do not like to engage financial institutions like banks to meet their financial requirements. They are always in search of alternative methods and tools through which they can raise capital through competitive rates.
One such competitive way to raise money is through a hard money lender.
In hard money lending, a private individual or investor obtains a loan from a group of private investors or individuals. On the face value, the conditions of this loan happens to be much stricter than alone that you would have acquired from a conventional bank but if you look at it from the lens of creative financial management you will find that many criteria structured in a hard money lending procedure is much more lenient than traditional banks.
In all agreements managed and given out under a hard money regime, all the loans are not long term loans but rather short term loans.
Most usual and common cases for raising money through hard lending is for the purposes of buying a property, or renovating a property in order for it to sell for a premium price. Therefore, many house flippers and house builders utilised the option of hard money lending in order to bridge the financing gap because in their industry not only the turnover of the asset needs to be quick but the raising of money should also be as quick as asset turnover.
Traditionally, banks take a lot longer to process your loan application and eventually grant them as compared to private investors lending money in hard money schemes.
Hard money lending versus alternative lending types
If you look up at the common practises their capital and financial resources are raised through hard money lending, you would identify one very common aspect that it is done for only commercial and business purposes.
Residential owners who wish to acquire property for their own personal use do not engage in raising money or having a mortgage through hard money lending.
Hard money lending is different from other funding mechanisms because here the processing time of a loan application is very quick. Moreover, the lenders do not cheque the credit history or income of the people who are wishing to raise money.
For them, the main factor that will play an important role whether they would grant the money or not is the business viability of the plan. If the property that the house builder or house flipper will be able to sell for a huge profit margin in a shorter time, most likely the loan will be granted.
In renovation properties, hard lenders make use of the after renovation value of the house in order to determine whether this is a good business viability or not.
Given that you have now understood the concept and usage of hard lending, you would have identified that this does not happen to be a traditional money raising scheme rather this could also be construed up as investment by investors but with a limited profit margin.
Differences between hard money lending and traditional means
On top of the differences that have already been mentioned, like hard money is not lent towards owner occupied properties, the length of the loan is very short, and money that is raised to be given away is done by pooling the resources of private hard money lenders.
Another major difference is that the criteria for lending is not institutionalised or universal. for each case it will differ.
The criteria can change as for the leverage gained by the private lenders.