Bank Financing vs. Hard Money Loans: The Cold Hard Truth

When can you get a Bank Loan vs When can you get a Hard Money Loan

While it is true that most business lending takes place through traditional financial institutions such as banks, sometimes traditional criteria can be difficult for a business or individual to meet. Creative borrowers and lenders can streamline their own loan criteria and terms, evading the formalities and statutes that traditional lending institutions must follow. A typical loan being funded through a certified lending institution can sometimes be referred to as a “soft loan.” Contrary to that, a “hard loan” is generally awarded by a private individual or investor, therefore its terms and interest rate can be less rigid and more flexible than those of a commercial lender.

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Making The Choice: Hard Money or Soft Money?

Why Borrow Soft Money Loans?

Soft money is a safe bet. It is loaned by a federally recognized institution and its interest rate is likely relatively low. Terms such as repayment schedules will also tend to be reasonable and sustainable, unlikely to endanger the financial health of your business or personal assets. Additionally, soft money loans are easily traceable and recorded. This allows them to become part of your personal credit history, allowing you to build a solid credit score… But here lies the problem. Where can you turn when you can’t meet the incredibly stringent criteria set forth by the traditional lender? They require impeccable credit history as well as more-than-sufficient collateral in order to successfully underwrite their loans, making it somewhat out of reach for the average borrower.

Why Borrow Hard Money Loans?

If you are looking to do an investment deal like a fix & flip, or rehab & refinance, if you’re looking to cash out your existing portfolio or consolidate other loans, or if your credit score and financial history are less than incredible, a hard loan may be your best (if not only) option. Although it may have a higher interest rate and the repayment terms may be more strict than a soft loan, receiving hard money financing can mean the difference between being able to procure the money to help realize your personal or business goals and being unable to secure these funds. Hard money lenders are forward-thinking, and this technique may work for you if your personal financial situation contains challenges that demand more creative methods.

Hard Money vs. Soft Money: Similarities & Differences

Hard Money and Soft Money Similarities

Whether it’s a soft loan from a bank, or a hard loan from an individual, it will involve eligibility criteria and repayment terms. Whichever one agrees to lend you money, they will expect to be repaid and will need to understand your plan on how and when this repayment will occur. Additionally, both hard money lenders and soft money lenders have contingency plans for cushioning themselves in the event you happen fail to repay the owed funds. Collateral is a frequent safeguard for both soft and hard loans, demanding you to commit personal assets in order to back up loan amounts in case of failure to repay.

Hard Money and Soft Money Differences

Because traditional lenders are subject to strict government regulations — even more so since the financial crisis that began in 2008 — you’ll most likely be unable to secure a soft loan if you have less than perfect credit, even if you have the assets and the income to back up the amount you wish to borrow. However, private lenders that provide hard loans are accountable only to themselves and their business. If they are confident in your ability to repay the capital you’ve borrowed, they have the discretion and the authority to lend it to you.

Which is right for you?

If you’re seeking a loan, there are obviously many factors to consider. Either way the fact remains, unless you have immaculate credit history and plenty of liquid assets, you will run in to far more obstacles if you attempt to secure funding through a traditional commercial lender. For this reason alone, more and more wise investors are beginning to understand the importance and ease of availability that hard money can offer.