In modern business, using hard money loans has become more popular. Is this type of loan a good choice for your business or a bad one? The truth is that things aren’t so black and white. Asset-based lending can be a wonderful tool or a financial gamble. The difference depends on the lender you choose and the way you use the funding.

The Importance of Choosing the Right Lender

First and foremost, hard money loans are a type of alternative financing. That means you won’t be able to get them from traditional lenders such as banks. Generally, these loans are offered by financing companies that deal exclusively with alternative financing. Sometimes, private investors are the ones providing this type of loan.

Why this matters is that alternative lenders have more flexibility to set their financing terms. This can be a very good thing or a very bad thing depending on the type of lender you work with.

Trustworthy lenders can use this freedom to offer your business more flexible terms than you would normally qualify for. They’re willing to look beyond strict credit score requirements and see business owners that are worth investing in.

Tips for Avoiding Problems With Hard Money Lending

Unfortunately, there are also less reputable lenders out there. They may make huge promises but hide extra fees in the small print. Not having many government requirements lets them charge for things you may not expect, leaving you with financial troubles.

The good news is that you’re not tied to anything until you sign on the dotted line. As long as you take your time reading the agreement, it’s not that hard to separate the great lenders from the few bad apples. You can also speak with other small business owners for recommendations for trustworthy hard money lenders.

The Way Asset-Based Lending Works

The specific terms of a hard money loan generally depend on what you’re using it to purchase. This type of financing can help you purchase equipment, real estate, inventory, and other items.

No matter the purpose, the method of financing is similar: The loan relies on collateral as backing. You receive financing for a portion of the value of the property or equipment. You can use this to close on the real estate, take care of remodeling and generate a profit from the sale.

Hard money loans work best when used as short-term funding that you can pay off in less than six months. Many businesses large and small rely on this financing method because of how easy and fast it is to use.