Commercial Finance- Hard Money explores the little known
world of financing real estate and business accounts receivable with respect to
situations that banks and other financial institutions typically avoid. The
year 2008 will be known for difficult financial times for large institutions,
businesses and individuals. Financing will be harder than ever to obtain.
The Merriam- Webster Online Dictionary defines hard
as:
“1 a: not easily penetrated: not easily yielding to
pressure b of
cheese: not
capable of being spread: very firm
2 a: of liquor (1): having a harsh or acid taste (2): strongly alcoholic b: characterized
by the presence of salts (as of calcium or magnesium) that prevents lathering
with soap <hard
water>
3 a: of or relating to radiation of relatively high
penetrating power: having high energy <hard X rays> b: having
or producing relatively great photographic contrast <a
hard negative>
4 a: metallic as distinct from paper <hard money> b: of currency: convertible into gold: stable in value c: usable as currency <paid in hard cash> d:
of currency: readily acceptable in international trade e: being high and firm <hard prices>
5 a: firmly and closely twisted <hard yarns> b: having
a smooth close napless finish <a hard worsted>
6 a: physically fit <in good hard condition> b: resistant
to stress or disease c: free
of weakness or defects
7 a (1): firm definite <reached a hard agreement> (2): not
speculative or conjectural: factual <hard evidence> (3): important
or informative rather than sensational or entertaining <hard news> b:
close
searching <gave
a hard look> c: free
from sentimentality or illusion: realistic <good hard sense> d: lacking in responsiveness: obdurate unfeeling <a hard heart>
8 a (1): difficult
to bear or endure <hard
luck> <hard times> (2): oppressive inequitable
<sales taxes are hard
on the poor> <a hard restriction> b (1): lacking consideration, compassion, or gentleness :
callous <a hard greedy landlord> (2): incorrigible tough <a hard gang> c
(1): harsh, severe, or offensive in tendency or effect <said some hard things> (2): resentful <hard feelings> (3): strict unrelenting <drives a hard bargain> d: inclement <hard winter> e (1): intense in force, manner, or degree <hard blows> (2): demanding the exertion of energy : calling for stamina and endurance <hard work> (3): performing or carrying on with great energy,
intensity, or persistence <a hard worker> f: most
unyielding or thoroughgoing <the hard political right>
9 a: characterized by sharp or harsh outline, rigid
execution, and stiff drawing b: sharply
defined: stark <hard
shadows> c: lacking in shading, delicacy, or resonance <hard singing tones> d: sounding as in arcing and geese
respectively —used of c and g e: suggestive of toughness or insensitivity <hard eyes>
10 a (1): difficult
to accomplish or resolve: troublesome <hard problems> <the
true story was hard to come by> (2): difficult to comprehend or explain <a hard concept> b: having difficulty in doing something <hard of hearing> c: difficult to magnetize or demagnetize
11: being at once addictive and gravely detrimental to
health <such hard drugs
as heroin>
12: resistant to biodegradation <hard detergents> <hard pesticides such as DDT>
13: being, schooled in, or using the methods of the
natural sciences and especially of the physical sciences <a
hard scientist>
14: of money: contributed (as by
individuals or political action committees) directly to a particular candidate
or campaign
Synonyms: hard difficult arduous mean
demanding great exertion or effort. Hard implies the opposite of all that is
easy <farming is hard work>.
Difficult implies the presence of obstacles to be surmounted or puzzles to be
resolved and suggests the need of skill, patience, or courage <the
difficult ascent of the main face of the
mountain>. Arduous stresses the need of laborious and persevering
exertion <the arduous task of
rebuilding>.”
As used in this article, hard money is intended to convey
the idea that because of the current economic conditions, many financing needs
will be more difficult to accomplish. They will require great exertion and
effort to overcome the economic obstacles of the current economy. Compared to
2006 and 2007, periods of relatively easy money, to obtain financing today you
will have to have firm, definite facts to support your financing needs. And the
cost of money will be more difficult to bear. Hard money is harder to find,
harder to obtain and harder to repay. Nevertheless, hard money may be an
economic necessity as a means to an end to grow a business or complete a real
estate transaction.
Why is 2008 a time of hard money? This is a difficult question to answer. If
you ask 3 experts you probably will get three different answers. It may be the
economic equivalent of The Perfect Storm- a True Story of Men against the Sea.
The phrase perfect
storm refers to the simultaneous occurrence of events which, taken
individually, probably would be far less powerful than the result of their rare
combination. These occurrences are rare by their very nature, so that even a
slight change in any one event contributing to the perfect storm would lessen
its overall impact. The stock market crash of 1929 and following depression
exemplifies a perfect storm of economic consequence.
What are these events today? 1) The Mortgage Melt-down. Major financial
institutions in the United States
are incurring billions of dollars in losses due to the loss in valuation of
their investments in mortgage securities. The consequence for borrowers is that
these institutions are less inclined to take risks when loaning money for fear
of additional losses. And their regulators are demanding that regulated lenders
raise their credit standards for borrowers to qualify for a loan. 2) The
devaluation of the American dollar versus other world currencies. The U.S.
government is spending ginormous amounts of money in excess of what it collect
in revenue due to the political compulsion to spend taxpayers’ money, the war
in Iraq,
Hurricane Katrina (and other natural disasters) and the war on terrorism. This
makes our currency less valuable. It makes importing to the U.S.
more expensive. The American people have less money to spend on goods and
services, and their money buys less than it did a year ago because prices of
necessities such as gasoline are higher. 3) The current tendency of Federal and
State governments to reduce funding for social services, health services and
education because of inadequate revenues; this hurts individuals and businesses
who have less money to spend on products and services which creates additional
drags on our economy. 4) The diminishing value of residential real estate all
across the United States.
This is related to the mortgage meltdown and the fact that many people incurred
debts that they cannot repay. The real causes of these events are complicated
and beyond the scope of this article. Suffice it to say that these are hard
times and hard times create needs for hard money loans.
What exactly is hard money? Here are seven examples:
1) A
commercial real estate loan where the borrower receives funds based on the
value of the property, usually 50% or less, at an interest rate higher than a
bank would charge. This is the most commonly understood type of hard money. In
this financing, neither the income from the property or the borrower
demonstrably supports the repayment of the loan.
2) A
real estate loan to buy a residential property where the borrower cannot prove
their income. This may be accomplished with financing from a seller, the only
party willing to take the risk of non-payment.
3) A
small junior lien on income producing commercial real estate where the first
lien is very large. For example, a million dollar second lien behind a ten
million dollar first lien. Most lenders simply do not want to consider a loan
of this type because of the potential liability for repayment of the first lien.
It is ten times the risk of the secondary loan.
4) Most
loans to people with less than excellent credit. Many loans are based on credit
scoring. If you do not have a credit score that is high enough for the lender’s
requirement, you simply do not get their loan and you may or may not be able to
find a hard money loan to accomplish your objective.
5) Accounts
receivable financing to construction contractors, medical providers and sellers
of agricultural products. Most factors do not offer to these sectors of the
economy because of the risks and complexities that are involved.
6) Purchase
order financing for items with gross margins less than twenty percent. The
twenty percent margin is a benchmark for sufficient profitability in a
transaction to pay all financing costs and create profits for the business
after all costs are paid. During hard economic times margins are squeezed. It
is a vicious cycle.
7) Loans
to businesses that are particularly negatively affected by the current economy.
For instance, a loan to build a new lumberyard is impacted by the downturn in
new real estate construction and a lower need for lumber. Most banks would
simply decline to consider such a loan. The same is true for developers seeking
to build new housing tracts or office building developments. This is not a good
time to try to start a new mortgage brokerage company; although it may be a
good time to be a hard money lender provided that you are very, very careful in
assessing your transactional risks.
What do all of these situations have in common? In
times of easy money these situations would be less costly to finance and more
likely to receive funding. Today, the lender’s answer to your request for
funding is more likely to be a polite but strong “no way”. Many lenders have
effectively (if not actually) shut their doors. Many lenders will simply
decline to lend on hotels/motels, gas stations, owner/user properties,
properties with any environmental issues. Borrowers who do not have FICO credit
scores above 680, with substantial net worth and income will find it is very
difficult to obtain many types of loans. Fortunately, the door for accounts
receivable financing is still wide open.
The bottom line: Hard times in our economy will tend to force more
individuals and businesses to borrow hard money- if they are able to get any
money at all. Commercial financing with hard money will tend to grow as
traditional sources of financing from banks and institutional lenders simply
will not be available.
Copyright © 2008 Gregg Financial Services
www.greggfinancialservices.com
Mr. Elberg is a licensed attorney and licensed real estate
broker. Gregg Financial Services is a full service brokerage for commercial
finance companies and banks that fund B2B businesses. We work with all industries and can arrange financing transactions
throughout the US and Canada, Mexico, Australia, India and several areas of Europe including the UK, Ireland, France, and Poland. Mr. Elberg
arranges funding from $25,000 to $50 million per month at competitive pricing,
and works to reduce your financing costs as your company grows. For more
information about GFS, please call 888 482 9221 or visit our website: http://www.greggfinancialservices.com
Mr. Gregg Elberg is a licensed attorney and licensed real estate broker. He specializes in many forms of commercial finance as a commercial finance broker for B2B business and commercial real estate. For more information about GFS, please visit our website: 
