Posted by Hard money lending, also known as asset-based lending, has suffered under the weight of an undeserved bad reputation for decades. But previously closed minds are gradually becoming more open to the truth of hard money. Even major financial institutions are recognizing the value of the asset-based model.
A good case in point is U.S. Bank. An article recently posted on their website sings the praises of asset-based lending as an alternative to cash-flow based loans. You know U.S. Bank’s attitude has changed when they run a post with the title, “ABL myth busters: The truth about asset-based lending”.
Loans Secured by Assets
Whether you call it asset-based lending or hard money, the thing that makes it fundamentally different from cash-flow lending is security. Hard assets offered as collateral back hard money loans.
Actium Lending is a Utah hard money firm based in Salt Lake City. They write loans in Utah, Idaho, and Colorado. They explained that the vast majority of their loans go to real estate investors looking to add commercial properties to their portfolios.
More often than not, borrowers offer the properties they are acquiring as collateral. Actium assesses the value of these properties before determining whether to approve. As long as they see strong value, most loans will go through.
Traditional Bank Loans Are Different
Traditional bank loans are different. Assets are still considered for collateral purposes, but what banks are truly interested in is cash flow. This is especially true when they are making commercial loans to investors and small businesses. Cash flow is a significant contributing factor to approval decisions.
In addition to cash flow, traditional lenders also consider a borrower’s credit history and score. They look at the borrower’s debt load. Essentially, anything that could have a negative impact on cash flow is dumped into the equation. If a lender suspects a borrower’s cash flow will not support repayment, approval will not be forthcoming.
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Not a Strategy of Last Resort
Surprisingly, the U.S. Bank post acknowledges that asset-based lending is not a strategy of last resort. So many people think it is, especially so-called financial experts who warn investors to stay away from hard money. Not only is hard money not a last resort option, but it’s also actually the best option in so many cases.
Investors tend to have non-traditional income. They struggle to demonstrate sufficient income to traditional lenders. So even if they can get loans, they pay higher interest rates and more fees as a result. In many states, traditional bank loans are also subject to recording taxes. Combining taxation with higher fees and mortgage insurance could ultimately make a traditional loan quite unattractive.
But wait a minute. Don’t hard money loans come with higher interest rates and shorter terms? Absolutely. But anyone who knows how lending works is aware of the fact the total interest paid is more a function of term than rate. Longer terms equal more total interest paid. Shorter terms mean just the opposite.
By nature, hard money loans are short-term loans with repayment periods of 6-24 months. Most borrowers do not pay prohibitive amounts of interest despite rates being a couple of percentage points higher.
It is Worth Looking Into
The long and short of the U.S. Bank post is that asset-heavy businesses and investors should look into asset-based lending. It is often a better option than a traditional counterpart. Here is my two cents worth: do not let the hard money designation scare you away. Asset-based lending is not the bogeyman it has been made out to be.