Run an internet search on small business funding and your favorite search engine will return more results than you’ll have time to look at. You will find articles talking about everything from small business loans to crowdfunding. Some will talk about hard money and bridge loans. Every type of business funding has its unique characteristics. Needless to say, not every funding type is appropriate to every need.
This post will discuss hard money and how it differs from other types of funding. Hard money is a very specific type of lending intended for specific types of needs. Of all the different business funding options out there, hard money is by no means the most popular.
Hard Money Is Short Term
Actium Partners, a Salt Lake City, Utah hard money firm, says the most important thing borrowers need to understand is that hard money is short term. A typical hard money loan as a term of between 6 and 12 months. Hard money loans can be extended for as long as two years, but such terms are the exception to the rule.
By contrast, a small business loan can have a term of 5 to 10 years. Depending on the lender, some small business loans can run even longer.
Hard Money Is Asset-based
Next, hard money loans are asset-based loans. In other words, borrowers offer certain assets as collateral. In a typical real estate transaction, the property being acquired acts as collateral on the loan. The lender would approve or deny the loan based on the value of that asset combined with the borrower’s down payment.
All small business loans and commercial bank loans are income-based. Assets are looked at to determine a borrower’s overall financial health, but approval is based primarily on a comparison between income and current debt load.
Hard Money Is Not Private Equity
It should be understood that hard money is not the same as private equity, even though hard money firms are made up of private investors who pool their financial resources to make loans. Hard money is lending in the strictest sense. Firms provide loans with defined terms and conditions. Borrowers repay those loans accordingly.
Private equity – and angel investing, for that matter – amounts to individual investors injecting cash into a company with the expectation of earning a return. Investors essentially become part owners. They expect to get their money out of the company, at some point in the future, by way of a cash payment or some sort of revenue sharing arrangement.
Other Forms of Business Financing
Hard money, standard loans, and private equity represent just three forms of business financing. There are others. Bootstrapping is one of them. Bootstrapping is more or less meeting your general business funding needs with your own personal finances. You might tap into your 401(k), the equity in your home, or even your credit cards to bootstrap your business.
Crowdfunding and peer-to-peer (P2P) platforms represent two more options. Both are pretty popular among startups looking to secure several years of funding to tide them over until they start generating a profit. Crowdfunding and P2P platforms have very little in common with hard money.
As you can see, business owners have a lengthy list of options for borrowing. There are even some options, like bridge loans, this post hasn’t discussed. That’s good for business owners and it means more opportunities to find the right funding option to meet a particular need. But just like retail borrowing, business financing needs to be approached cautiously. Getting in over one’s head could spell financial disaster.