A typical business carries a certain amount of debt. It is normal. However, larger companies tend to carry larger debt than their smaller counterparts. This is mainly because larger companies establish revolving lines of credit to ensure they can maintain cash flow. But what do they do when it is time to think about debt consolidation?
Hard money is a tool some companies lean on for debt consolidation purposes. Hard money is private, asset-based lending that allows businesses to leverage equity to raise cash. Normally, that equity is realized through real estate holdings. But there are cases when hard money lenders will work with equity built into business equipment and machinery.
The Debt Consolidation Goal
Debt consolidation in a business setting is not particularly different from individual debt consolidation. A business might be looking at several high-interest debts it would like to roll into a single, lower-interest loan. Saving money on interest payments is good for the bottom line.
On the other hand, interest rates on hard money loans tend to be higher than their traditional counterparts. They can be several points higher, in fact. So why consolidate with a hard money loan when a company could just as easily go to a traditional lender for help?
Hard Money Is a Lot Faster
The answer to that question is found in a single word: speed. As explained by Salt Lake City’s Actium Lending, hard money lenders work a lot faster than their traditional counterparts. What takes a traditional lender 60-90 days to complete, a hard money lender can accomplish in under a week.
Speed can be very, very attractive to a business looking to consolidate debts ahead of one or more of its current financing options reaching maturity. Let us paint a hypothetical picture to explain how this would work.
Imagine a mid-sized company with two high-interest debt instruments set to mature at the end of the month. Realistically, the company does not have enough time to refinance or seek a new line of credit with a traditional lender.
A hard money loan could leverage equity to pay off the two existing debt instruments while also keeping the company going until a traditional financing package can be arranged. A hard money loan with a 12-month term could suffice.
Important Things Business Owners Should Know
Leveraging hard money to pay off two maturing debt instruments could work out well even if the rate on the hard money loan is higher. But before a business owner was to make such a move, there would be some important things to consider:
- Security – Hard money loans are secured by collateral. The business owner has to offer something of value. If he got the loan but could not follow through, he could lose that collateral.
- Temporary Financing – Hard money loans are short term by nature. That means they are considered temporary financing compared to traditional loans. A business owner should not expect to carry a hard money loan perpetually.
- Interest-Only – Hard money loans are typically structured as interest-only loans. A balloon payment will come due at maturity. So if a business doesn’t arrange some other means of paying off what was borrowed, there could be quite a bit of pain when the loan comes due.
It’s not appropriate to say that hard money is always the best choice for business debt consolidation. But it is worth looking at. Some businesses might find that the speed and easier lending criteria hard money is known for makes it ideal for temporary debt consolidation. Others might choose to look elsewhere.
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