In simple terms, short-term loans have easier policies and higher interest rates. Bridge loans or hard money loans do not elongate for years. Mostly they are off for one to two years, and they have many advantages that attract business people, especially those working in real estate.
Why real estate, you ask?
Because real estate has high turnover in less period of time, whether you are fixing and flipping to sell the property or renting it out, you will get the loan amount in no time. Now, many might ask, why not bank loans? Why take the risk for a bridge loan?
We will answer this question in the excerpt below, alongside giving you a guideline of what you should and shouldn’t do regarding bridge loans.
Who Is Lending These Loans
A very common question asked by many if this is their first time availing of such loans. If it is not the bank, they are certainly not the government. These are mostly private investors who are equity funding these hard money loans.
It is a form of equity investment where they either make a profit through the high-interest rate or become direct investors to the businesses for which the loan is being availed, and they make money from the percentage of profit.
In most hard money lending companies around the state, one individual is lending to another person. You will find very few individuals loaning to multiple lenders through the money lenders.
Difference Between Hard Money & The Bank
The major difference between hard loaned money and bank is the credit history and the mortgage. We will discuss them further.
Mortgage: Bank vs. Hard Money
To give you a simple example, if you are lending money from a bank with the hopes of opening your business and buying a property, the bank will sign that property as a mortgage. This means, in terms of inability to repay the loan, the bank has a right to seize the mortgaged property under their name and then auction it off. Bridge loan investors do not have these mortgage rules banks do. They are more likely to give a quick loan with high interest as their main income is the mortgage. On the other hand, during any inability to repay, they will simply take over the business for which the loan is taken, as any investor would.
Types Of Loans – Bank Vs. Hard Money
Banks have a plethora of loans to offer, from residential loans to personal to business. Hard money lenders, on the other hand, assess the risk for any type of loan, and they do not provide residential loans. Since there is no mortgage, you cannot avail of a bridge loan for buying your own property. The investors do not see any opportunity for profit when it comes to residential loans. Therefore, they would stick to businesses that have a possibility of profit. Hence, hard money lenders majorly provide loans to real estate businesses for fixing and flipping and then selling the property at a much higher rate.
Credit History – Bank Vs. Hard Money
Since banks do take a risk when providing all types of loans, and they usually do not make money from the profit of a business, credit history is a big deal. They would never give the loan to just anyone, especially when someone doesn’t have a solid property to their name or cannot provide a good mortgage.
Credit card records and previous expenditure history with income play a big role in availing of a loan from the bank.
Bridge loans are much easier compared to that. Afterall, it is a very short-term loan with a high interest rate. Plus, these investors are funding a growing business, so previous credit history is not a matter of concern for hard money lenders.
What You Should Consider
Now that you know the difference between hard money and bank loans, it is time to make a judgement call.
There are pros and cons to both.
However, if you are someone about to start a business with nothing, we would suggest going for bridge or hard money lenders in Austin.