Most of the clients who apply with Salt Lake City’s Actium Partners for hard money loans are looking to purchase commercial real estate. They are real estate investors who rely on hard money to get deals done quickly. But is that the only use for hard money? Absolutely not. There are plenty of other uses, including restructuring business debt.
Although Actium Partners deals mainly with real estate investors, they say it is not uncommon for businesses to turn to hard money for debt restructuring, especially when their existing financing partners don’t want to continue extending credit.
Hard money can be the bridge between past and future credit options.
Settling a Past Credit Instrument
A perfect example of this sort of thing is a company with a credit instrument nearing maturity. For illustrative purposes, let’s just say it’s the Acme Shoe Company. They have an outstanding line of credit their bank extended to them some five years ago. Acme has always lived up to the terms of the loan. But now, as the loan’s maturity date is approaching, the company does not have enough cash on hand to pay the balance and keep daily operations funded.
The bank refuses to refinance the debt with a new loan. Meanwhile, the company doesn’t have enough time to get credit set up with another bank. Instead, they turn to a hard money lender who offers a short-term bridge loan for 12 months.
With the bridge loan in place, Acme can pay off their existing loan on time. Then they will have 11 or 12 months to arrange a new line of credit with a new bank. They will eventually use that new line of credit to pay off the hard money loan and perhaps meet some other financial obligations.
Made Possible with Collateral
It goes without saying that relying on hard money to restructure business debt isn’t the norm in the hard money industry. But it does happen. That is because hard money lending is made possible with strong collateral. As long as a business has collateral to back a hard money loan application, lenders can find a way to make it happen.
A business might have a piece of real estate it can offer as collateral. If not, it may have certain types of equipment that could be offered. What matters most to the lender is that the proposed collateral has enough inherent value to cover the amount being borrowed. That is the big thing with hard money lenders.
Lenders need to see sufficient value in the collateral. Equally important, the collateral has to offer high liquidity. What does that mean? It means that it can be sold fairly quickly. It can be converted into cash should the need arise. High liquidity reduces a hard money lender’s risk substantially.
Why Hard Money Is More Accessible
You might wonder why hard money lenders would help businesses restructure their debt when banks won’t. In simple terms, why is hard money more accessible? Because it is based on the borrower’s assets. Asset-based lending operates on a different business model. And because hard money is private money, it is not subject to the same rules as traditional funding.
Traditional lenders need to go the extra mile to mitigate losses before they lend. Hard money lenders have a lot more flexibility. They can see their way clear to helping businesses restructure their debt as long as said businesses have high value collateral with equally high liquidity. When it works – and it does more often than not – both parties end up on the winning side.
