Hard money lending is asset-based lending. That means lenders require significant collateral to back up a loan prior to approval. What constitutes significant collateral? Collateral with enough value to cover the amount being borrowed. Note that most hard money lenders are very picky about the collateral they will accept.
Loans for Real Estate Projects
It is easier to understand collateral requirements in the hard money game when you realize that the vast majority of all hard money loans go toward real estate projects. For example, Salt Lake City’s Actium Partners lends almost entirely to real estate investors in Colorado, Idaho, and Utah. These are investors putting money into commercial properties like warehouses, office buildings, etc.
The properties themselves are the collateral. So if a client requests an Actium loan to acquire a commercial shopping center, the shopping center becomes collateral for the loan. It needs to possess enough value to cover the amount being borrowed.
Commercial Investment Collateral
The kind of collateral a hard money lender requires is commensurate with loan purpose. Given that hard money lenders will lend for virtually any kind of commercial property, the kinds of collateral lenders deal with are nearly limitless. Collateral can be:
- Office buildings
- Retail spaces
- Warehouses and industrial buildings
- Mixed-use properties
- Multi-family residential properties
Note that multi-family residential properties are considered commercial properties for investment purposes because they are purchased and held to generate revenue. They are business assets to the owner.
Residential Investment Collateral
Although Actium Partners doesn’t get involved in residential real estate, there are plenty of hard money lenders that do. These lenders provide the same kinds of loans to investors looking to purchase residential fix and flip properties as well as vacation homes. Collateral works the same way.
Also note that some hard money lenders are more than happy to get involved in land development projects. For them, collateral could look like anything from a vacant lot to a development site to completely untouched land that hasn’t even been cleared or improved.
Lenders are content to approve hard money loans based on collateral because property is considered liquid. In other words, it’s easy to sell a property to recover the amount lent should a borrower default. Lenders stand to lose very little if they are careful about valuing collateral before approving a loan.
Collateral on Other Types of Loans
Although the vast majority of hard money loans go toward real estate transactions, there is no legal requirement for lenders to restrict themselves to such deals. As private lenders, they can lend to whomever they want and for whatever reason. It does happen.
Hard money lenders sometimes lend to businesses looking to expand their operations. They have also been known to lend for mergers and acquisitions and even debt restructuring. What acts as collateral for such loans? Whatever lender and borrower are willing to agree to.
In nearly all such cases, collateral is some sort of business or strategic asset. So imagine a local construction company that specializes in commercial buildings. Ownership wants to create a second division for residential projects. The company’s existing heavy equipment could act as collateral on a loan obtained to get the new division up and running.
A Private Arrangement
The beauty of hard money is that it is a private arrangement between lender and borrower. So technically, even though real estate is almost always the collateral on a hard money loan, the two parties can settle on just about anything. The only requirement is that the collateral has enough value to cover the amount of money being borrowed.
