Hard Money Lenders for Business Acquisitions
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Hard money loans for business acquisitions are typically short-term loans (ranging from 6 to 24 months), usually collateralized by real estate and funded by hard money lenders.
A key advantage of these loans is their speed; they can be funded in just a matter of days, relative to bank loans that can take weeks or months to be approved.
Entrepreneurs and investors often use these loans to purchase businesses because hard money loans don’t carry the extensive red tape and documentation most banks require.
While factors such as credit score and income do play a role in obtaining a hard money loan, the most critical factor in the approval process is the amount of equity the borrower has in the property being used as collateral.
Hard money lenders prefer to see a low loan-to-value ratio (LTV) on the collateral asset, which helps illustrate that the borrower has a greater stake in the transaction.
Since timing is everything during a business acquisition, the speed and flexibility of these loans can play a significant role in helping borrowers get an edge on attractive deals.
Hard money lenders, sometimes also known as bridge lenders, are usually individuals, small companies, or family and friends.
Unlike traditional banks, hard money lenders are smaller, more flexible institutions that can approve loans within 5 to 7 days, allowing borrowers to move quickly and secure opportunities.
A purchase offer on a business acquisition that’s backed by a hard money loan is usually an all-cash offer, making it very attractive to sellers.
All-cash offers ensure sellers that the person bidding on the business or property will be able to execute the transaction without any delays, which are often associated with SBA or conventional financing.
SBA loans might be the most well-known financing option for buying a business, but in reality, these loans are rarely used due to their lengthy approval process (sometimes lasting months), the large amount of required paperwork, and the need for personal guarantees, which can be very risky.
Hard money loans, on the other hand, are much more straightforward, making them faster and easier to fund.
Contrary to conventional bank loans, which can take weeks or even months to be approved, hard money business loans can be funded in a matter of days, providing borrowers with the efficiency, transparency, and versatility needed to close deals.
Rather than requiring tedious documentation, such as tax returns and employment history, a hard money lender’s underwriting process is centered around three key things.
Private money lenders always prioritize the real-world value of assets over bureaucratic red tape and reliance on traditional fractional-reserve banking, allowing business owners to secure funding in days rather than months.
Here’s a step-by-step process of how a typical hard money loan for a business acquisition gets funded.
The borrower provides basic information regarding the business being acquired and the property being used as collateral, enough details to give the lender a clear understanding of the deal.
Lenders will want to see a reasonable LTV but will not heavily weigh credit, employment history, or income-to-debt ratio.
Pre-approval for a hard money loan can typically be completed within a brief 5- to 10-minute phone call.
To assess the property's value, a lender will typically use an appraisal company, a broker’s opinion of value (BPO), or conduct their own analysis using recent comparable sales in the area.
Since hard money loans are significantly influenced by the value of the collateral asset, factors such as FICO scores, income, and other documentation are not of great importance.
A lender’s primary concern is whether the collateral property has sufficient equity to withstand a downturn in the real estate market, and whether the borrower is financially capable of making the monthly interest payments.
If all goes well, approval can be given 24 to 48 hours after the initial phone call.
Once approved, the borrower can expect to have the funds in approximately a week, allowing buyers to close deals quickly, outpacing competitors.
Usually, a prerequisite to obtaining a hard money is the borrower informing the lender how they plan to repay the borrowed funds.
Common exit strategies include refinancing into an SBA loan, obtaining a traditional bank loan, selling a property or using income from the business to repay the lender.
Hard money lenders for business can fund deals in a very short timeframe, sometimes in as little as a matter of days, unlike traditional bank loans that often take weeks or even months.
The value of the collateral asset secures hard money loans for businesses. This means even if the company has no established credit but owns a real estate asset, it can still qualify for a hard money loan.
All businesses are unique, and many unexpected scenarios can arise in today’s fast-paced business world. Hard money lenders can customize and tailor the loans to each specific client and situation, including term, loan duration, repayment, and deal structure.
Especially beneficial if you need to move quickly, such as seizing an existing business opportunity in your market, while your competitors wait for long-term financing to be approved.
Most hard money loans are interest-only, with rates ranging from 8% to 15%. These high interest rates, along with other upfront costs, including origination points, can add up to a substantial sum of money.
These loans are designed for short-term durations to bridge funding gaps (typically 3 months to 2 years) and should be used as such. They are not for operational funding or long-term growth.
Because the loan is secured by property or assets, defaulting on a hard money loan can result in the lender seizing those assets.
Russell is a seasoned real estate investor, writer, and hard money lending expert, as well as the co-founder of Crescent Lenders. He holds a degree from the University of Southern California’s Marshall School of Business. Outside of work, Russell enjoys surfing and spending time outdoors with his dog, Amy.