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Bank loans are arguably the most common form of financing big-ticket purchases for both businesses and consumers. Hard money is another option for business needs, but to a much lesser extent. Simply put, hard money loans are not for everyone. They are designed to meet certain kinds of needs that don’t fit well with traditional lending scenarios.

Hard money loans often fund real estate investments. They fund business expansion, debt restructuring, and other limited commercial needs. But even if a borrower is looking for hard money to fund a project that lenders are known to welcome, this still doesn’t mean going that route is the best option.

1. Higher Rates, Shorter Terms

Every type of funding has its downsides. With hard money, the biggest downside is represented in higher rates and shorter terms. Hard money lenders charge higher rates in order to mitigate the extra risk they take on. It is normal; it is expected; it is reasonable.

As for shorter terms, hard money lenders want to get in and out as quickly as possible. Salt Lake City’s Actium Partners says that a typical hard money loan offers a term of two years or less. Some hard money lenders will not go more than a year. Terms that short just aren’t doable for some borrowers.

2. Assets Play a Huge Role

Assets play a huge role in hard money lending. In fact, lending in the hard money game is based almost entirely on the borrower’s assets. The borrower must offer a valuable asset as backing before a loan will be approved. Without an asset, there is no point in even applying.

The good news for real estate investors is that the properties they are attempting to obtain also act as collateral. Assuming everything else is in order, this virtually guarantees that a hard money lender will be willing to offer at least something. Still though, if the value of the asset isn’t high enough, hard money might not do much good.

3. Lender Preferences Also Play a Role

Something else to consider is that lenders have preferences in terms of the deals they get involved with. Getting back to Actium Partners for a minute, they don’t loan for fix-and-flip projects. They also do not provide construction loans. There are other hard money lenders that will look at both types of projects.

The point is that a borrower might not find a local hard money lender whose business model allows them to fund the project at hand. That means going outside the local area. Out-of-state lenders are out there, but the further a borrower goes to find funding, the less likely their chances of success.

4. Default Can Be a Big Problem

Hard money might not be the best option if a borrower’s finances are right on the edge of making a loan affordable. Remember that hard money lenders don’t focus a lot on credit worthiness when approving applications. They rely on asset value. So if a borrower is right on the edge, not making good on a hard money loan could lead to costly default.

Also consider that hard money lenders in most states can address default in weeks or months. By contrast, state laws typically force banks to go through a process that could take more than a year. But when a hard money loan is in default, lenders typically act swiftly.

Hard money is a valuable financial tool that a lot of borrowers use to their advantage. But it’s not the right option for every borrower and every scenario. Borrowers should think long and hard before going the hard money route.