Choose to apply for a business loan from a conventional lender and you had better be prepared to furnish a ton of paperwork. Conventional lenders thrive on documentation. They need reams of it to meet underwriting requirements. Hard money lenders, not so much. They do not even ask about business plans.
A hard money lender is a private lender. Right off the bat, this offers a glimpse into why business plans are not required to obtain hard money or bridge loans. Private lenders aren’t required to follow the same rules as banks and credit unions. As such, they dispense with cumbersome rules that do not add any value to what they do.
According to Actium Partners out of Salt Lake City, UT, business plans are just one thing on a list of many that most private lenders don’t require for hard money. Also on that list are personal credit reports, accounts payable and receivable information, and the details of a business’s finances.
Most Borrowers Are Investors
There are several reasons business plans are not required for hard money loans. The first is as simple as the reality that most hard money borrowers are investors. They do not have businesses in the traditional sense of the word. They buy properties for one of two reasons:
- Long Term Rental – Some investors specialize in commercial rental properties. They acquire office buildings, warehouses, strip malls, etc. and make their money over many years of collecting rental payments.
- Adding Value – Other investors choose to acquire value-add properties. These are properties with a value that can be increased through rehab or general improvements. Once there is enough equity in a property, it is sold.
Although property investing is technically a business under the law, it is not a traditional business. Investors do not have business plans. Therefore, there is nothing to furnish.
When Borrowers Are Traditional Businesses
On occasion, a hard money borrower is a traditional business. It might be a company looking for a hard money or bridge loan to meet immediate financing needs while a permanent form of revolving credit is established.
In such a case, a lender really doesn’t care how the borrower runs his business. That is all a business plan provides anyway: information about what a business does, how it serves its customers, and so forth. None of that is relevant to hard money lenders due to the way they make approval decisions.
Approval Is Based on Collateral
At the core of everything discussed thus far is the idea of collateral. Every hard money or bridge loan a private lender makes is backed up by some sort of tangible collateral. In the case of a real estate investor, the property being obtained through the financing is the collateral. In the case of a business, the collateral might be business equipment or a piece of real estate the company owns.
Private lenders are only interested in the value of the collateral. As long as it has enough value to cover the amount being borrowed, approval is generally forthcoming. If the value isn’t there, a loan application will be denied.
Business plans are required by banks and credit unions because they make approval decisions based on their estimate of a borrower’s ability to repay. They also pull personal credit reports and ask for income verification.
In hard money, none of that extemporaneous information matters. A hard money lender will never ask for a business plan because such a plan has nothing to do with collateral value. Collateral is that which interests hard money lenders. If you have it, you are a good candidate for private lending.