Hard Money Lenders for Business Acquisitions
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What Are Hard Money Loans for Business Acquisitions?
Hard money loans for business acquisitions are 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.
Why Use a Hard Money Lender for a Business Acquisition?
Faster Business Acquisitions
- Hard money loans have a streamlined approval and underwriting process compared to banks
- Funding can often be secured in a matter of days rather than weeks
- This allows buyers to act quickly when time-sensitive deals arise
- Can reduce the risk of losing a target business due to slow financing
Competitive Advantage
- All-cash offers are more attractive to sellers, as sellers often prefer buyers who can close quickly and without financing issues.
- Investors presenting all-cash offers have leverage in negotiations over a competitor who has not yet secured financing.
- It enables entrepreneurs and investors to secure high-demand businesses before competitors.
- This is especially useful in competitive markets or at auctions, where speed is crucial.
Help Business Expansion
- Hard money loans can provide additional capital for growth after acquisition.
- Can be used for working capital, equipment purchases, or renovations.
- Offers flexibility in structuring repayment to align with business cash flow.
- Helps buyers scale operations quickly without waiting for traditional financing approvals.
How Hard Money Business Loans Work
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 factors .
- Asset quality: Desirable area in a major city, a liquid property type (ideally not land or construction), and currently producing income.
- Loan-to-value ratio (LTV): Borrowers need to have skin in the game; 25-30% equity or more is ideal.
- Exit strategy: Lenders want to know how they will be repaid; conventional refinancing or selling the property are the most common methods.
Private money lenders prioritize the real-world value of assets over bureaucratic red tape.
Here’s a step-by-step process of how a typical hard money loan for a business acquisition is funded.
Application & Pre-Approval
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 (less than 75%) 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 or by applying online.
Property Appraisal or BPO
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.
Loan Approval
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 two primary concerns are 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.
Funding
Once approved, the borrower can expect to have the funds in approximately a week, allowing buyers to close deals quickly, outpacing competitors.
Exit Strategy
Usually, a prerequisite to obtaining a hard money loan is the borrower informing the lender how they plan to repay the borrowed funds.
Common exit strategies for hard money business loans include refinancing into an SBA loan, obtaining a traditional bank loan, selling a property, or using income from the business to repay the lender.
What are Hard Money Lenders for Business?
Hard money lenders, also referred to as bridge lenders, are typically 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 the person bidding on the business or property will be able to execute the transaction without any delays or issues often associated with SBA or conventional financing.
Most Common Business Acquisition Types
- Hotels
- Mobile Homes
- Parking Lots
- Assisted Living Facility
- Motels
- Storage Facilities
- Convenience Stores
- Auto Shops
- Manufacturing
- Tow Yards
- Laundromats
SBA vs Hard Money Loans
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.
SBA Loans
1 to 3 months, or longer
Requires strong personal & business credit
Usually required, but flexible
10% to 20%
Low to moderate (5% to 9%)
5 to 25 years
Comprehensive: tax returns, bank statements, business strategy, etc.
Moderate
Buying a business, equipment, or expansions
Hard Money Loans
1 to 3 days
Less critical, more focused on collateral
Property or business assets
25% to 40%
Moderate to higher (8% to 15%)
6 to 24 months
Minimal: appraisal, basic info, purchase contract, and exit strategy, etc.
High, great for unconventional deals
Quick property or business acquisitions
Hard Money Loans for Business Acquisition
Pros
Fast Access to Capital
Hard money loans for businesses can be funded 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.
Flexible Approval Criteria
The collateral asset acts as security for a hard money business loan. 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.
Customizable Terms
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.
Ideal for Time-Sensitive Deals
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 approval.
Cons
Higher Costs
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.
Shorter Durations
These loans are designed to bridge funding gaps (typically 3 months to 2 years) and should be used only for short durations. They are not to be used for operational funding or long-term financing.
Risk of Collateral Loss
Because the loan is secured by property or assets, defaulting on a hard money loan can result in the lender seizing those assets.
Handpicked Resources
Hard Money vs Bridge Loans Tools
Hard Money Loan Calculator Tools
Fix and Flip Calculator Hard Money
Hard Money Lenders California Blog
What Happens if You Default?
About the Author
Russell Barneson Hard Money Lending
Russell is a seasoned real estate investor, writer, and hard money lending strategist, 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.