Hard money loans are often used by real estate investors and other business owners to purchase real estate quickly. 

Can these loans also help your business establish business credit? Find out here. 

How Do Hard Money Loans Work?

Hard money loans are loans that involve using real estate or other property to secure the loan. The word “hard” in “hard money” refers to physical assets that serve as collateral for the loan. 

The most common types of hard money loans are real estate loans, where the funding is based on the value of the property, either before or after renovations. 

These loans are often made by private lenders or specialized financing firms. 

Learn more about how hard money loans work here.

What Are the Advantages of a Hard Money Loan?

There are several advantages to hard money loans:

1. The approval process is often fast and hard money loans may be funded in days if the deal is right. 
2. Qualifications are often flexible; the collateral is often the basis for the loan. 
3. Credit score requirements are often flexible; good credit may not be required. 

If the deal is right, hard money loans can provide business owners or real estate investors with a deal that would be hard to fund through traditional lenders. 

What Are the Disadvantages of a Hard Money Loan?

While these loans may be fast and flexible, there is a cost. Higher interest rates are common, and these loans may only be available for short-term funding. There may be a balloon payment that must be repaid after a period of time.  

What Credit Score Is Needed for a Hard Money Loan?

Creditworthiness isn’t as big a factor as with other types of small business loans or financing options. 

Credit score requirements are very flexible. Some hard money lenders don’t check credit at all, whether that’s personal credit or business credit. 

When there is a credit check, credit score requirements may be lower than typical business loans. Many business credit cards often require a credit score of at least 650—680, for example, but these lenders may extend credit to those with credit scores in the 500s. 

The lender may use what’s called a “soft pull” to review credit. This type of credit check does not create a hard inquiry or impact credit scores. Be sure to check whether that’s the case before you apply. 

Do Hard Money Loans Require a Down Payment?

Yes, a down payment is often required. However, there are some 100% hard money loans. To be more specific, some lenders may offer a loan of 90% to 100% of the purchase price and 100% of the rehab budget, as long as that will total less than 70% to 75% of the after repair loan-to-value (ARLTV).

Do Hard Money Loans Show up on Credit?

Hard money loans made by individuals who make these types of loans probably won’t show up on business credit reports. However, if you get a loan from a hard money lender that advertises more widely it may be reported. It’s up to the individual lender whether they choose to report. 

How Can I Get a Hard Money Business Loan?

There are a couple of ways to get hard money business loans. One is to connect directly with a hard money lender, which may be an individual who makes these types of loans. Real estate investors may find local hard money lenders through real estate investment clubs or other types of networking.

The other option is to find a hard money lender that works with borrowers in multiple states. These companies often publish their basic underwriting criteria so you can understand quickly whether you may be a fit. 

Learn: Best Hard Money Loans With 100 Percent Financing

How Can Hard Money Loans Impact My Business Credit Score?

If a lender reports payment history on a regular basis to business credit agencies, and you make your payments on time, a hard money loan can help build your business credit. 

Again, it’s up to individual lenders whether or not to report to credit bureaus and not all lenders do. Check with the prospective lender to find out whether they report. 

Do Business Loans Help Build Credit?

Yes, many business loans and business financing options can help small business owners establish business credit. Since payment history is the most important factor in any credit scoring, it’s essential to get accounts that report to business credit, and to pay them on time.

Here are some common types of financing and how they can impact business credit:

Line of credit: A business line of credit allows you to borrow against a specific amount for which your business has been approved. These are usually reported to business credit and can be a valuable credit reference as well as a solution to short-term cash flow challenges. 

Term loans: A loan for a fixed amount of money, these are often offered by traditional banks as well as online lenders. Loan amounts are often larger, on-time payments can help build a positive credit history. 

Equipment financing or leasing: If your business needs equipment, an equipment loan or lease makes it easy to acquire or upgrade that equipment. Payment history is often reported.

Crowdfunding: While crowdfunding can be a great way to raise money for a business, not all types of crowdfunding will boost business credit. One that does: Kiva.org offers 0%, no fee loans that can help build business credit when paid on time. 

Business credit card: These and business charge cards can be a great way to build business credit. Most issuers report to business credit agencies, and they are often available to startups as well as established businesses. That also makes them a popular option with fix and flippers. 

Commercial real estate loans: If your business qualifies for a commercial real estate loan, those payments will likely help build business credit. 

SBA loans: One type of SBA loan, the 504 CDC loan, may be used to purchase real estate. It’s not used by real estate investors, but it’s a great loan program for businesses that plan to occupy the property purchased. It offers good repayment terms and lower interest rates, and may even be easier for some businesses to get than a traditional loan due to the SBA guarantee. 

Vendor terms: This type of credit is offered by suppliers on payment terms (such as net-30). Vendor accounts that report are a popular way to build business credit, as this credit often offers easier qualifications. 

Nav’s Verdict

Entrepreneurs who seek hard money loans often need fast financing with a simple application process.

If your goal is to build business credit, however, a hard money loan may or may not help. Not all report to business credit bureaus. In addition, hard money rates can be higher than other financing options. Still, hard money lending can provide essential funding that can lead to a profitable investment. 

If you’ve found a good investment opportunity but don’t qualify for a bank loan or more traditional financing, you may want to consider a hard money loan to make it happen. Then use other options, like Nav Prime, to help build a business credit history.