You might have heard it said that hard money lenders only require borrowers to bring some collateral and a down payment to the table. As the thinking goes, those two things are enough to secure a loan. It turns out they are not. There’s one more thing most hard money lenders require: an exit strategy.
What is a hard money exit strategy? In simple terms, it is a plan to repay the loan. An exit strategy for hard money differs from a business loan installment plan in that lenders allow borrowers to decide how they will repay rather than requiring them to make fixed, monthly payments over a set amount of time.
There are exceptions to the rule but, as explained by Salt Lake City’s Actium Partners, hard money lenders give borrowers flexibility in their exit strategies. A number of typical exit strategies are explained below.
Sell the Acquired Property
Real estate investing is one of the most common purposes for hard money. Investors want quick cash so they can seize a deal before it gets away. In such cases, the plan is to turn the property around so that it begins generating profits in short order. Then the property is sold in order to repay the loan.
There are also cases in which hard money is being sought for other reasons. The borrower is not necessarily looking to purchase and flip a property, but property is still offered as collateral. The borrower’s exit strategy might involve selling that property at some point down the road.
Selling Other Assets
Imagine a small business looking to hard money as a means of funding expansion. That business intends to open a new location complete with all new equipment, chattels, fixtures, etc. Upon completion of the new location, the old location will be shuttered. Any assets related to that location can be sold to repay the loan.
One of the advantages of selling other assets is that it does not endanger the borrower’s liquidity in the short term. But it may be problematic if the asset sale doesn’t generate enough money. As such, this strategy is not as preferable as some of the others.
Taking on a Conventional Loan
A borrower looking for hard money due to time restrictions may have future plans to pursue conventional small business loans. Seeking hard money now meets immediate short-term needs while future loans will handle the long-term. The strategy can be effectively employed to exit a hard money arrangement.
A good financing plan works well for both paying off hard money and improving a company’s ability to get traditional loans. The hard money is used to strengthen the business in the short term so that small business lenders will be more amenable to lending in the long-term.
Taking on Another Hard Money Loan
Under some exceptional circumstances, a borrower’s exit strategy might involve taking on another hard money loan to pay off the first one. Though it is rare, some lenders are willing to extend credit by offering second loans. A good example is offering a second loan to cover expenses on a real estate project suffering from construction delays. A second loan pays off the first while also providing the investor with a bit extra cash to finish construction.
An exit strategy is simply a plan to repay a hard money loan when due. It is important to have one in mind when you apply, as it demonstrates you have thought through the implications of accepting hard money. Lenders are more reluctant to approve loans when borrowers do not have an exit strategy in place.