Small Business Financing Solutions

The Request

A small business owner recently contacted me at my business credit coach for a hard money loan. He wanted to borrow $170,000 on a property valued at $360,000. His goal was to build a garage to house and work on his truck, as he owned a transportation business.  The borrower went to numerous sources to be dragged along for 3 months with no solutions. The borrower requested a hard money loan our small business financing solution includes a business revenue loan, equipment lease and business credit card bundle.

The follow up solution of developing business credit may get lost in the need for immediate action, but it is the most important solution provided.

The Facts

After carefully probing the customer to understand exactly what he wanted to do and the assets he had at hand. I ascertained these facts:

  • The property in questions was his primary residence (not usable for hard money loan).
  • The borrower had a recent bankruptcy less than one year old.
  • The borrower has been recently sued (hence the bankruptcy).
  • The borrower recently changed the business from a sole proprietor to an LLC (11 months ago).
  • The borrower only needs $80,000 to build the garage, would like $20,000 for cash reserves.
  • The borrower has monthly cash flow of $40,000 to $50,000
  • The borrower has free and clear equipment valued at $90,000 only 30 months old
  • The borrower has personal credit score of 660 plus
  • The borrower has been in business for 10 years

The Solution

Though we could not do the deal the way he requested (no one could) we were able to provide these small business financing solutions for the customer:

  1. Business Revenue Loan                       $40,000                          (4 days)
  2. Equipment Loan                                   $40,000                          (15 days)
  3. Business Credit Card Bundle             $20,000                          (10 days)
  4. TOTAL FINANCING                           $100,000                       (15 DAYS)
  5. Follow up solution build business credit to be separate from personal credit that will allow borrower to easily get line of credit for $50,000 to $250,000 based solely on the payment history of their business.

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Qualify For a Hard Money Loan

Hard Money Loan Qualifications.

Investors ask me to send them information on a hard money loan. It is hard to tell them exactly what the qualifications are for financing their project. The options vary greatly because hard money lenders are private investors. Some are individuals others are private trusts or small investment funds. Each private investor creates their own guidelines. Unlike conventional residential mortgage financing there is no secondary market and there are no organizations like Fannie Mae or Freddie Mac t0 establish uniform or conforming guidelines. But each hard money lender has certain criteria that they evaluate. The qualifications that each bridge and real estate rehab lender have in common are:

  1. The property type and after rehab value.
  2. The exit strategy.
  3. The down payment.
  4. The investors experience.
  5. The investors credit.
  6. The investors cash reserves.

The Property.

There was a time and will be again were the property and the after rehab value of the property was the sole consideration of doing a short term loan to a real estate investor. Whether the deal is commercial or residential investment property this remains the most important key to the deal. The reasons it is not the only criteria is that lenders have been burned by the declining value of properties and the excess of properties available. This means they have to taken collateral for the short term loan and the exit strategy of the borrower did not work. If the investor foreclosed the values have less than anticipated and the cost are more because it takes longer to dispose of these properties. Yet the collateral still remains the most important criteria. The lower the loan to value the better the deal. Even though some lenders will go as high as 65 to 70% of the after rehab value those deals are tough when so many are available at or below 50%. As an investor you should seek to purchase property where all cost involved in purchasing, renovating, and your exit strategy would equal to less than 50% of the after rehab value.

The Exit Strategy.

Almost of equal importance to the collateral to many purchase rehab lenders is the requirement for a solid verifiable exit strategy. If you say you are going to sell it you should have a buyer who is pre-approved and their information needs to be verifiable by the lender. If you say you want to refinance the property then you need to have the income, credit and assets to qualify for a conventional refinance loan. Whatever your exit strategy is it must be verifiable by the lender. This is good for the lender and for you. No one wants to get stuck with non performing assets.

Down Payment.

Though there are programs that do not require down payment they are fewer than ever. Most hard money lenders require a down payment. For this reason it is good to be prepared to invest 20% to 30% in your projects. Because there are so many projects available yet funds are limited a down payment makes your project easier to fund. Also if you have poor credit assets help. That said, there are ways to purchase distressed properties with little or no money down.

The Investor.

The credit, assets and experience of the investor play a significant role in the underwriting  process. For a real estate investor to qualify they should have good credit, assets and experience. If you as an investor are not strong in all areas then you need to be stronger in others. Meaning the deal with lower than 50% loan to value, a strong exit strategy and or a down payment will be considered favorably even if the credit, income and assets are not the best. Because each private investor has different criteria, it is hard to say one deal will qualify and another would not based on one criteria or another. But, the property, exit strategy and assets are most important. Many deals will qualify solely on the after rehab value of the property, the exit strategy and the down payment. Even though there are no down payment deals available you need to be a strong investor to qualify for them.

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Choosing Investment Property – Financing it with Hard Money

Hard Money Loan.

A loan from a hard money lender is a short term financing arrangement made to a real estate investor who usually want to purchase and rehab a commercial or residential property. The interest rates and fees on these loans are much higher than conventional financing. They are attractive to real estate investors because most of these loans are made based on the value of the property after rehab with no seasoning requirements. The collateral is the most important qualifying criteria for these loans private lenders. The collateral is also be the crucial criteria to savvy real estate investors. The collateral is the investment and successful investing is buying low and selling high with minimum risk while investing as little money as possible. This also works for the investor who wants to keep the property for long term cash flow and appreciation. Understanding this basic investment philosophy and having a tight focus on your own real estate investment strategies will help you choose the properties.

Personal Investment Strategy.

Once you decide to invest in real estate the first choice you need to make is to determine the type of property and the location or area you want to invest in. Do you want to invest in residential or commercial property. If you choose to buy residential property do you prefer single family homes or 2, 3 or 4 unit properties. These decisions may be guided by the property available as well as financing options. Today there are many more creative financing options available to those who choose commercial real estate over residential properties. Historically it has been easier to finance single family residences. Since all financing has gotten tighter financing larger units may be a better option in todays market. In the past commercial lending required a larger down payment than investing in residential property. The reality is that in todays market there are more financing sources for commercial properties than there are for residential investment properties.

Criteria for Financing a Property with a Hard Money Loan.

A simple strategy I employ when investing in real estate, whether residential or commercial is to not invest in more than 50% of the after rehab value. That means the total acquisition costs (including financing and soft costs) plus the rehabilitation costs will be equal to or less than 50% of the After Rehab Value. Your acquisition costs include any costs associated with the purchase of the property. This includes title charges, attorneys, taxes, transfer, insurance, inspections, appraisals, and financing costs. Your rehabilitation costs are labor, materials, permits and inspections. The total of your acquisition and rehabilitation costs should not exceed 50% of the the after rehab value because you need a solid exit strategy to refinance or sell the property after your investment property has been stabalized.

Exit Strategy.

When you invest property by using a hard money loan all lenders require a solid exit strategy. Remember your interest rate is much higher than you would pay for conventional financing and your loan is only for a short term as a requirement of the hard money lender and in your best financial interest you should have a solid exit strategy. A solid exit strategy is not selling the property, if you do not already have an approved buyer in place. A solid exit strategy is not refinancing the property if you can not qualify for the refinance loan. So ultimately, you should have an approved buyer in place or you yourself can qualify and have been approved to refinance the property. This is why when you choose an investment property the after rehab value should never be greater than 50% of the acquisition and rehab costs. These properties are easier to finance and easier to sell for a profit. You could even sell to another investor, pay off your hard money loan and make a profit.

Return On Your Investment.

Though the costs of a hard money loan may seem obsene at times, where can you invest little or no money in an asset that doubles in value in less than 6 months. You can investing in real estate. A hard money lender can make you a fortune if you understand leverage and choose the right properties with a solid exit strategy.

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