The modern business environment is tough, and fraught with challenges that can make or break your business. These days, it’s not enough to simply offer a quality service or product. The characteristics that set aside successful modern businesses are simple – agility and innovation.
The ability to react quickly to opportunities is paramount to the ongoing success of your business. Seizing openings in the market and taking chances are key factors that differentiate leading firms in the new paradigm of uber-competition and various external pressures.
However, few businesses, especially in their growth stages, have the cash at hand to speculate on a viable opportunity. This is holding back small and medium businesses worldwide, however the effect is more pronounced in the Australian market.
Low interest rates have not made it easier for home and business owners to secure loans. The barriers are higher than ever, and for many otherwise deserving organisations and individuals so high they are forced to delay their economic growth.
Thankfully, there is a solution. Traditional “soft” loans are the bread and butter of the lending economy. However, as businesses diversify, so do their sources of finance. “Hard” loans are an increasingly popular source of capital for businesses across the world. From Silicon Valley start-ups to Gold Coast construction contractors, hard loans are figuring large in the conversation of rapid, easy capital raising.
Hard Loans Explained
Hard money loans (also known as private money) are outside the traditional finance system. Rather than acquiring funding from a traditional lending house such as a Big Four bank, hard money loans come from varied sources, including individuals. They often demand a higher interest rate, but can exceed traditional soft loans in their flexibility and increased likelihood of approval.
In addition to higher interest rates, hard money loans are often associated with increased fees when compared with soft loans. However, the flexibility associated with these loans can make them a highly attractive short term option.
Is a Hard Money Loan Right for Your Business?
As a riskier, higher cost alternative, hard money loans aren’t right for everyone. They are not an ideal solution to funding or cash flow concerns, and due to harsher rates, they can often impact a business’ ability to respond quickly to changing market conditions.
However, for firms that have found themselves in a bind, a hard money loan can be a fantastic solution. For many organisations, project delays or unforeseen issues can greatly impact their ability to retain existing funding or secure future support.
A perfect example of this is the construction industry. Risk-averse lenders have been known to withdraw funding on construction projects that experience delays, which can leave property developers exposed to the market.
Hard money loans can bridge the gap between existing issues and future profitability. If the future of your business is bright, but the present is bleak, a hard money loan can tide you over.
Securing a hard money loan for your business is now easier than ever. Competition among lenders has caused a significant reduction in interest rates across the board, with some rapidly approaching rates that rival traditional lenders. Hard money loans aren’t as difficult to obtain as they used to be, however they still retain the increased difficulty of repayment.
Compared to a soft money loan, hard money comes with higher interest rates, higher fees, and a different risk tolerance and associated measures from the lender.
Soft money loans will retain their popularity far into the future, not only due to the lower cost of obtaining and repaying them, but also the safety that comes with them (for all parties to the transaction).
Before applying for a hard money loan, it’s critical that you consider your options. Speaking to a professional is the only safe course of action. Taking on a loan that your business will struggle to repay can often defeat the initial purposes of seeking it out.
You know your business better than anyone, but financial advisors know finance better than anyone. Always research your options, and decide what is right for you.
About the author
Christopher Sales is the founder and director of mortgage broker, Finance Warehouse. In 2016, he was nominated in the Australian Top 10 Brokers Newcomer of the Year category. He previously wrote Maintaining focus: the illusion of motivation for Dynamic Business.