Financing real estate acquisitions is pretty typical for the hard money industry. Most hard money loans go toward funding commercial real estate deals. Some lenders even specialize in residential fix-and-flip projects. But hard money can be used for virtually anything, including addressing high-value debts that are too pressing to put off any longer.
Two very good examples include tax debts and maturing debt that the businesses need to either restructure or pay. Hard money is ideal for both types of debts because it is fast and fairly easy to obtain – if a borrower has collateral with sufficient value.
Hard Money for Paying Tax Bills
Facing a tax bill and having no funds to pay it can put a person in a dicey situation. Even if the IRS or state taxing authorities don’t aggressively go after a person for payment, unpaid tax bills accrue interest and penalties. It doesn’t take long for a fairly small tax bill to get pretty large.
Hard money offers access to fast cash that can get a tax bill settled in a matter of days. And although hard money loans usually come with higher interest rates, those interest rates might still be lower than the interest and fees accruing on unpaid taxes.
The beauty of utilizing hard money to pay a tax bill is the ability to get a loan without an extensive credit check. Actium Lending, a Utah-based hard money lender that specializes in commercial real estate, says that collateral value is the most important thing. Lenders can usually find a way to make things happen if the value of the collateral being offered covers the amount being requested.
Hard Money for Maturing Debt
Although individuals could turn to hard money to address maturing debt, this particular scenario is more often the domain of businesses. Imagine a mid-sized company facing a maturing note that needs to be paid within the next month. The company is arranging a new financing package, but it will not come through in time to meet the company’s obligation.
That company can turn to hard-money lending, using its own assets as collateral. A hard money loan would allow the company to pay off its maturing debt while waiting for the new financing package to be arranged. The new package ultimately provides the funding necessary to pay back the hard money lender.
Things to Note About Hard Money
Addressing high-value debt with hard money is one way to go. But borrowers should know what they are getting into before signing a loan agreement. There are important things to note about hard money, including the following:
- Interest Rates – Hard money loans typically come with interest rates several percentage points higher than their traditional counterparts.
- Short Terms – Hard money loan terms are also comparatively short. Average loan terms are 6-24 months. Lenders will sometimes go as high as 36 months, but it is rare.
- Interest-Only – Although there are exceptions to the rule, most hard money loans are structured as interest-only loans. Borrowers should be prepared for a balloon payment at the end.
- Exit Strategy – Hard money lenders require a reasonable exit strategy before they will approve a loan. So in addition to high-value collateral and a sizable down payment, a borrower must have a viable way to pay the loan back.
Traditional financing can be used to address high-value debt. But the speed it takes to arrange traditional financing makes doing so challenging. Hard money is attractive because it can be arranged in days rather than months. It is an option for addressing high-value debts requiring immediate action.
