The terms ‘hard money’ and ‘asset-based lending’ are sometimes used interchangeably among real estate investors. The intent is understood by anyone in the business. But technically, not all asset-based lending is necessarily hard money lending. It is possible for the two terms to refer to distinctly different funding options.
A good way to look at it is to compare it to dogs. All domesticated dogs belong to the Canis familiaris species regardless of breed. Knowing that, we can say that all labrador retrievers are dogs. But not all dogs are labrador retrievers. Asset-based lending is similar. All hard money loans constitute asset-based lending, but not all asset-based loans are hard money loans.
What Hard Money Looks Like
Hard money loans are so named because they are backed by hard assets. While various hard money lenders may do things slightly differently, they all follow the same basic model. They offer short-term commercial loans backed by collateral. In exchange for fast approval and funding, they charge higher interest rates and insist on extremely short terms.
Take Salt Lake City’s Actium Partners, for example. They might provide a hard money loan to a Utah real estate investor looking to purchase a new piece of property. The property itself acts as collateral on the loan. Actium Partners offers a certain amount of money – based on their established LTV ration – for a term of no more than 12 months. Actium earns a nice profit while the investor gets access to fast cash that enables him to close the deal quickly.
The three hallmarks of hard money are short terms, fast funding, and hard asset security. Without all three, you are not looking at a true hard money loan.
Asset-Based Lending Principles
Asset-based lending is more broad than hard money. It can take the form of hard money, but it can also be offered as bridge loans, gap loans, fix-and-flip loans, property improvement loans, and so forth. Asset-based lenders who do not restrict themselves to short-term hard money tend to be more flexible all the way around.
Here are just a few examples of what asset-based lenders can do apart from hard money:
1. Rental Loans
Lenders can finance the acquisition of rental units with combined values of tens of millions of dollars. In a typical rental loan scenario, the lender offers terms of anywhere between 5 and 20 years. As for collateral, the property or properties being obtained with the loan still provide backing.
2. Commercial Property Development
Asset-based lenders can finance commercial property development from the ground up. This is something hard money lenders tend to stay away from due to its long-term nature. Terms on property development loans can be as long as 10 years.
3. New Builds
Along the same lines as property development, asset-based lenders are known to assist with new builds on land that has already been developed. One project might involve putting up office or retail space. Another might involve adding housing to an existing restricted deed community. Loans can be structured primarily as construction loans or be split between construction costs and other financial needs.
Asset-based lenders who choose to avoid hard money lending tend to welcome longer terms and a variety of different project scenarios. On the other hand, hard money lenders tend to prefer a narrower scope and shorter terms. Neither one is right or wrong. It is a matter of preferred lending strategy.
While asset-based lending and hard money are not always the same thing, both types of lending come from private lenders rather than banks. That is the one consistency you can count on.