When does it make sense for a developer to use a hard money loan?
Category : Hard Money Loans
Even investors and developers with strong financial statements and access to bank credit often choose to use private money loans (also called “hard money loans”). Situations where private money loans make the most sense include those where the borrower:
- Requires a quick closing and banks cannot meet the deadline;
- Better opportunities than cash;
- Wants to avoid spending too much time raising equity or debt from many different smaller investors, but prefers to instead focus on finding new opportunities;
- Lacks the patience or time to deal with the bureaucracy of securing a loan from a bank;
- Excellent investment opportunity, but does not have sufficient financial strength to get a bank loan, and/or;
- Has a bank line of credit but needs a larger loan than is allowed under the existing bank line.
The common theme is that there is an opportunity for the borrower to generate substantial gain easily, and the cost of interest and origination fees is small relative to the anticipated profit, even given the higher interest rates charged by private lenders versus banks.