After meeting with multiple bankers and getting rejected for a loan because your business actually needs money. You will hear a recommendation to find a hard money lender. There are many hard money lenders to choose from. The key is finding the right one.
Look for a hard money lender that is familiar with your industry. There are hard money lenders who focus on restaurants and hard money lenders who focus on retail stores. You may want to speak with you industry association and see if they know of good hard money lender.
The interest rates hard money lenders charge is anywhere from 12% up to 28%, or the highest your state law allows. It is always a good idea to check your specific states interest rate limit. There are different limits for commercial loans than personal loans.
The size of the loan also makes a difference. For example; the State of Texas limits the interest on commercial loans to 18%, with the ability for the rate to rise to 24%, but loans over $250,000 can be 28%.
Hard Money Lending Scam
A hard money lender may ask for a percentage of your business as part of the terms of the loan. Borrowers need to understand that there are loans and there are investments. Make sure you understand what you are agreeing too. A lender may loan $100K to your business, expect the money to be repaid from the business, and still keep 25% of the business. In a situation like this, you are not selling 25% of your business for $100K. You are giving away 25% of your business, so that you can get a loan.
Watch out for the Advance Fee! As mentioned in other articles on our site. The biggest scam in lending is when the “broker” or “lender” asks for a fee to process the loan. The salesperson will look very professional. They will convince you that the loan is ready to be funded, it is just waiting on your fee. This happens to many new borrowers. Never pay a fee before you receive the loan. Just like when you buy a home, the money all goes into an escrow account and all transfers happen at the closing. The same thing with a commercial loan, the lender or broker gets their fees at the closing from the proceeds of the loan.
Not all hard money lenders are scams. Many of them are honest, and legitimate lenders. The fact that they charge high interest rates, does not make them a scam. But the scams in the industry, give the good people a bad name. When dealing with an honest hard money lender, they will happily share with you, how to detect a scam lender.