02 Sep 2014

Disadvantages of hard money funding and loans:

Updated: July 29, 2021

Hard money lending is attractive on the surface. However, you need to consider a multitude of factors to make a decision on your business funding efforts. Hard money lending is likely not an option when all is said and done.

If you’re seeking business funding, you’ve probably considered hard money due to its benefits that are realized on the surface of the transaction. Meaning, there is no actual benefit to hard money if you consider the totality of circumstances. That is, overall, hard money is always a bad idea (save for a very, very few limited time-sensitive circumstances). Here are a few reasons why hard money is a bad idea. Fear not – we also have some other ways that you can get funding!

You’re already uphill.

First of all, if you begin to enter a transaction with a hard money broker, you’re already in an uphill battle. Meaning, when lenders know you suffer from a deficiency are prepared to take advantage of you. It does not matter if the deficiency is from credit, income, business history, etc. The question here is, why would you allow this to happen when you can avoid it?

More aggressive than banks.

Hard money lenders are absolutely less forgiving than even the big banks (despite the fact that many people feel big banks are horrid). Hard money lenders do not get to play with Monopoly money like big banks (thanks to the Federal Reserve).

What does this mean for you? Hard money lenders are considerably more aggressive in collecting any money a borrower owes them. Even if there were some kind of mistake, hard money lenders will be quick to accelerate the note and foreclose it without regard for circumstances that warrant their consideration. This is just the nature of the lending process.

Unconscionable Dealings.

Most hard money contracts fall under the concept of unconscionable dealings. In short, the moneylender creates extremely one-sided agreements that benefit themself.

I’m directly stating that these contracts are unfair. However, given the difficult nature of hard money lending, I don’t blame the hard money lender.

However, this does not mean you should engage in hard money. It means you should avoid it.

Why consider it?

Generally, hard money loans are considered by people who feel (or actually are) unqualified for conventional business funding. Further, other alternatives seem more desirable than hard money loans. In the case that someone is unqualified, it simply makes no sense to consider the hard money loan.

If this is the case, there are other ways that you can get approved for funding. Rather than considering the hard money loan you should consider fixing your credit, improving your credit using authorized user tradelines, or seeking the counsel of a credit expert to determine whether or not there are ways to avoid hard money. In almost every case we have seen, there are ways to avoid hard money loans.

Alternatives to Hard Money.

If for some reason, you feel you are unqualified for conventional business funding methods, hard money is an option. However, and as discussed above, it’s usually a bad option. An alternative to hard money is an unsecured business line of credit. In fact, an unsecured business line of credit (in some cases) is preferable to a conventional business loan.

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