The property development industry is a competitive market, one that demands much from those looking to break into the market. Property developers need to be patient, respond quickly to changes in the market, and plan thoroughly, amongst other things. However, one of the highest priorities for property developers is finding a good, reliable way to raise finance. Without this, any plan to develop a property into a remarkable commercial success will likely never come to fruition.
Bridge loans fill this need, taking the crown as one of the foremost methods of raising finance for property developers. This is due to the key advantages boasted by bridge loans, namely their speed, flexibility, and ability to raise considerable sums of money. These benefits make bridge loans an incredibly useful tool when purchasing and developing property, whether it be from the market or auction. However, although bridge loans are invaluable for property developers, they can’t always get the job done.
Hard money loans offer a useful alternative to property developers when bridge loans aren’t quite suitable. Although similar to bridge loans, hard money loans offer certain advantages and applications that bridge loans do not. In this article, we will discuss these two forms of finance, how they work, and the differences between the two, ensuring you have the information you need to make the right decision. Let’s get started.
What is a bridge loan?
Bridge loans fall under the umbrella category of secured loans. Owing to their advantages, bridge loans can be used to raise vast amounts of capital in record time, by leveraging the equity a borrower has in existing assets. Borrowers can use their assets to secure loans of high value, assuming the assets are similarly valuable. Additionally, this method of securing the loans against assets makes for a quick application process, one that does not place as much emphasis on the usual trappings of a loan application. For example, credit history and income are not nearly as important, provided you have an asset that can pay back the loan if it is sold. This makes bridge loans perfect for purchasing property, and borrowing against property.
All this being said, bridge loans do pose a considerable risk for borrowers in an unstable financial position. As part of the loan agreement, lenders will place a lien on assets used as collateral. This grants these lenders the right to seize said assets should the borrower be unable to make repayments, up to the value of the loan left outstanding. Naturally, this can be disastrous for certain borrowers, as the loss of a specific asset could further deteriorate their financial position. As bridge loans are a short-term form of finance, one that generally lasts no more than 12 months, this can further add to the financial pressure, and therefore the risk, faced by these borrowers. As such, it is a good idea to carefully consider your situation before taking action.
Also Read: Bridging Loans vs. Personal Loans
Advantages and disadvantages of bridge loans
There are plenty of advantages to using bridge loans. Flexibility is the most significant draw, with borrowers able to take out as much or as little finance as they need, assuming they have the assets to secure the loan. Moreover, bridge loans have a wide range of applications, from the purchase of land and property, to funding a development project. All this can be done at very short notice, as bridge loans have an expedited application process compared to other forms of finance.
Although bridge loans have noteworthy benefits, they have their downsides, too. As we mentioned, bridge loans pose a risk to borrowers that lack financial stability, due to the short-term nature and requirement for collateral. In addition to this, although bridge loans are great for purchasing property, they aren’t ideal for purchasing derelicts or other properties that require heavy refurbishments. This is because bridge loan lenders generally prefer to lend against “finished” assets, and aren’t likely to entertain a run-down property with or without good commercial potential.
Also Read: Is It Possible To Use Bridging Loans For Pension Payouts?
What is a hard money loan?
Hard money loans also fall under the category of secured loans. Similar to bridge loans, hard money loans are secured against a hard asset, such as property, vehicles, equipment, and so on. Similar again to bridge loans, this requirement of hard assets to be used as collateral makes for a swift application process, one that concerns itself less with credit scores, documentation, and the like, and more with the value of said assets. If you need to raise finance quickly, or you have a poor credit history, hard money loans could be a good option for you.
Advantages and disadvantages of hard money loans
There are several key draws to using hard money loans. As we have mentioned, they are quite flexible and accessible, owing to the streamlined application process and variety of applications. Borrowers with bad credit, those who need finance quickly, and everyone in between can get what they need when they need it with a hard money loan. Additionally, it is commonplace for a hard money loan to completely fund a purchase or project, without the need for a deposit or additional loan to cover a shortfall.
However, there are some downsides. Firstly, hard money loans require collateral, which poses a risk for the borrower. Moreover, they can be more expensive than their counterparts, especially for those with bad credit. In exchange for accessibility, borrowers with bad credit may expect to pay a premium in interest rates and other fees. There is also the chance that your hard money loan agreement comes with early payment fees, meaning you can’t completely escape the higher interest rates by paying off the loan early.
The difference between bridge loans and hard money loans
Given the overview of both loans, you might be wondering what the difference is between the two. While it is true that bridge loans and hard money loans are very similar, they are not identical forms of finance. The main difference between the two is application; while bridging loans are great for funding the purchase of a property, they are not so good at funding a development project involving a building of dubious condition. For hard money loans, this drawback is not the case. Borrowers of hard money loans can easily find lenders willing to lend to a project involving the refurbishment of a run-down building.
Which is best?
Which loan is best largely depends on your situation. The two types of loans are so similar that, by and large, you would benefit as much from one as you would the other. The exception to this is in scenarios where a borrower wishes to purchase a run-down property to develop. As we have mentioned, bridge loan lenders are often quite reluctant to lend to such projects, making hard money loans the better choice. That said, it is strongly advised to consider your situation, and obtain the advice of a financial professional before taking action.