Hard Money Loans

photo credit: MTN_CompanyThe sky is falling! Run for your life! The banks aren’t lending! Well, the first two might be correct, but the last one is not. Commercial banks are lending, but they are very picky.

Private lending practices are known for being very forgiving and very sloppy. One needs look no further than the current financial mess to realize as much. Banks were handing out money to pretty much anyone who asked for earlier this decade. The result? An overheated housing market that finally collapsed and is even now taking down banks right and left with it.

Commercial banking is a part of the financial industry that bears little resemblance to personal finance. In fact, about the only common factor is both have the word “banking” in them. Other than that, the process of successfully applying for a loan is very different. Regardless of the type of commercial loan you are seeking, there are always four basic components you need to be strong on.

Hard capital is the first element of the four. It refers to the hard assets owned by the business. This can include things such as real estate, machinery and the like. If the business has significant assets, a bank is more likely to give you a loan secured by those assets. If you then default on the loan, the bank can sell off the assets to recover some of the funds. Banks generally don’t like doing this, so just having a significant amount of capital will not be enough to get you a loan.

Our second element is the collateral for the loan. Huh? Isn’t that what we were just talking about? No. Hard capital refers to assets owned by the business. Collateral refers to assets the business owner’s own personally such as their homes and interests in other businesses. By any name, this is a personal guarantee. It is a way for the bank to both shift risk to the business owners and verify the owners are serious about making things work. It should be noted that a personal guarantee trumps the protection provided by a corporate or LLC shell. Put another way, you lose the protection of those entities if you personally guarantee a loan.

Our next factor is revenue history. Also called capacity, this refers to the ability of the business to make the loan payments based on the revenues it is generating. If the business asks for a loan that will require $10,000 in monthly payments, but only brings in revenues of $9,000 a month, it does not have sufficient revenues to service the loan. This rather obvious example would result in a rejection of the loan application by a bank.

To the surprise of many business owners, the last element considered is their personal credit history. The bank wants to know if you’ve cut and run on loans like this before. It will give your credit history the once over and will also gauge if you are a good risk by looking at your FICO score.

Can you get a business loan in the current financial markets? Yes, of course. You just have to make sure you are strong on the four elements above.

Stephen Teak writes about hard money business loans for CommercialLoanStop.com – providing financing in even the worst markets