Search online for an explanation of where hard money got its name and you will find a lot of strange opinions. It is not even worth doing them justice by discussing them in a post like this. Instead, it’s more profitable to discuss the truth. And here it is – hard assets are really what make hard money hard.
Every form of lending has some sort of collateral attached to it. The collateral on a residential mortgage is the home being purchased. The collateral on a car loan is the car itself. Even credit cards and other types of secured credit have a form collateral behind them: the full faith and credit of the borrower.
In the hard money game, collateral is some type of hard asset with enough value to cover the amount being borrowed, along with any expected costs that might arise as a result of default.
Collateral in Commercial Real Estate
The way to understand collateral in a hard money scenario is to look at commercial real estate. For the record, Salt Lake City-based Actium Partners explains that most hard money goes toward acquiring commercial property. Investors use hard money loans to add new properties to their portfolios.
In such cases, the property being acquired is the collateral. As real property, it is considered a hard asset. A hard asset is a tangible asset with inherent value. It is an asset that can be quickly liquidated if necessary.
A hard money lender looking at a loan application would undoubtedly appraise the property being acquired. The property would need to have enough inherent value to cover the amount being borrowed. In addition, the lender would expect to incur certain costs in the event of default. So to cover those costs, the property’s value actually has to be greater than the amount being borrowed.
Collateral for Other Transactions
While most hard money loans fund commercial property transactions, hard money isn’t exclusive to that need. Hard money is made available for other needs as well. Business expansion is just one example. Businesses looking to open additional locations or expand their current premises might turn to hard money loans to get things started.
Just about any tangible assets a business currently owns could be offered as collateral. Maybe the business owns the land on which its building sits. The land could be offered. Perhaps the business owns high-value equipment that could act as collateral.
One of the advantages hard money brings to the table is flexibility. Hard money comes directly from investors, and those investors are free to accept any type of collateral they choose. They are not limited to making loans exclusively on the value of real property. If they want to accept business equipment as collateral, they can.
Hard Assets Are the Key
An undercurrent in all of this is that hard assets are the key to successful borrowing. There’s absolutely no point approaching a hard money lender if you don’t have hard assets capable of supporting the loan that you’re after. Hard money lenders do not write loans on a borrower’s good faith promise to repay.
One final aspect of this is the common loan-to-value (LTV) ratio. Hard money lenders typically work with higher LTV’s. That means borrowers need to come in with larger downpayments.
A significant down payment along with a high-value asset will almost always lead to approval. That is how hard money works. Hard money isn’t hard to get if you have both. Finally, don’t forget that hard money takes its name from the hard assets offered as collateral. It is no more complicated than that.