Lending Library

As you grow your business, applying for financing can boost your working capital to achieve your goals, whether you want to smooth out cash flow, prepare for financial emergencies, or  expand your operations. There are two primary types of small business funding to consider, each of which comes with its own set of pros and cons. Understanding a line of credit vs. business loan is a great first step in making a smart decision for your business based on your individual needs and goals. 

Business Line of Credit: How Does It Work 

A line of credit provides small businesses with flexible financing on your own schedule. Rather than getting a lump sum as you would with a business loan, you instead get access to a line of credit up to a certain dollar amount. You can draw on the credit line whenever you need capital, and only pay interest on your outstanding balance. 

This type of revolving credit is similar to the way a credit card works. When you pay back part or all of your outstanding balance, you can then borrow from that amount again when you need to. It’s easy to get a sense of how much a certain balance would cost using a business line of credit calculator.

Business Line of Credit: Terms and Rates 

A business line of credit can range anywhere between $1,000 and $500,000. Rates range from as low as 8% APR to as high as 24% APY. If you open a business line of credit with bad credit, you’re more likely to pay a higher rate. Funding times are quick, usually providing the cash you need within one to two weeks. The maturity term typically lasts between one and two years. 

It’s rare to find a business line of credit with no credit check, but you may be able to qualify with a personal credit score instead of one for your business. Similarly, you may not be able to get a business line of credit with no revenue at all, but you could qualify after being in business for a minimum period of time—often six months. 

Business Line of Credit: Requirements

Most lenders have specific requirements in terms of credit score, time in business, and revenue. Lendio’s network of partners typically request the following eligibility minimums:

• Personal credit score of 560+
• 6 months in business
• $50,000+ in annual revenue

A secured line of credit requires some type of collateral to back the financing. You’ll typically receive better terms, like a lower interest rate. Alternatively, you can also opt to apply for an unsecured line of credit, which doesn’t involve any collateral at all. 

Business Loan: How Does It Work?

Another type of financing is a small business loan, which is structured very differently from a business line of credit. You’ll get a one-time lump sum of cash to use however you want for your business. Then you’ll have fixed monthly payments over a set period of time, which include both principal and interest payments.  

Repaying a business loan is similar to repaying any type of installment loan, like a car payment or a mortgage. As long as your interest rate is fixed, so is your monthly payment. It gives business owners the ability to plan their finances because the payments don’t change. 

Business Loan: Terms and Rates 

Business loans typically range from $5,000 to $2 million. The larger amounts of money are reserved for stable businesses with a strong track record and enough revenue to handle the payments. The repayment period can also vary, usually between 1 and 5 years. Rates start as low as 6% APR and funding time is fast—online lenders can deposit cash within 24 hours. 

Business Loan: Requirements 

Business loans often require a review of both the company’s financials and the owner’s personal finances. As part of your application, lenders will review:

• Your credit history
• Time in business
• Collateral 
• Revenue

Just like a line of credit, a business loan can either be secured or unsecured, depending on whether or not you pledge any assets as collateral.

Business Loan vs. Line of Credit: The Difference 

There are benefits of a business line of credit as well as a business loan. Both help you build your business credit score, as long as the lender reports payments to the credit bureaus.  

With a business line of credit, you can borrow as much as you need over a set period of time thanks to a flexible credit line. Plus, the line of credit is replenishable, so you get ongoing access to capital. 

With a business loan, you receive one lump sum of capital. You would have to apply for another loan in order to qualify for additional funds. On the plus side, loans come with a fixed monthly payment so you can easily budget to pay off the balance. 

Business Loan vs. Line of Credit: Which One Works Best for You?

There are a few different factors to help you determine which option is best for your business: a loan or line of credit. 

Amount needed: Term loans typically offer higher funding amounts than lines of credit. If you need to purchase a major asset, like a piece of equipment or real estate, then a loan is probably better than a line of credit. But if you don’t need a huge loan amount and have several purchases to make over an extended period, then a line of credit may be better. 

Timeline: Because loans often include larger amounts, they also have longer repayment periods. A line of credit, on the other hand, usually needs to be repaid in a year or two. 

Predictability: If you’re looking for a predictable payment plan, then a business loan is the way to go. But if you have consistent cash flow and don't mind paying relative to the amount you borrow, then a line of credit could be a good choice. 

Ready to fund your business? Apply for a business loan or line of credit from Lendio.

Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter.

We all love to celebrate a founder who bootstrapped their way to the top. 

• MailChimp was built in-house by a design agency. 
• Sara Blakely funded Spanx with $5,000 of her own money, got into Neiman Marcus, and never looked back. 
• And the GoPro guy (Nick Woodman) moved back in with his parents to get his now-billion-dollar company to its initial public offering. 

Many early-stage entrepreneurs buy into the allure of being the next bootstrapped billionaire. A few of them actually make it, too. But behind every bootstrapped business is an owner who may be putting their business’ health at risk.

Bootstrapping definition

What is bootstrapping in business?

Bootstrapping is self-funding your business. You use your own savings and earnings to keep the business afloat—through the highs and the lows—in the hopes of achieving success without a business loan or early-stage investors. To fund business expenses, bootstrappers tap into money on hand, including savings and personal credit cards, as well as 401(k)s, second mortgages, and, of course, reinvesting their income. They may also work a day job while they grow their small business at night, or vice versa.

Why bootstrap?

Why would a founder bootstrap their company?

You have an idea. It’s good. And when that idea is to start a business, it’s not unusual for the business owner to turn to the easiest-to-access resources: their own funds. In fact, getting a startup loan often requires a six-month history in business (there are, however, other financing options beyond loans). So it can make a lot of sense to self-fund a business, at least for a while. 

Additionally, there are some very small businesses that legitimately don’t need outside capital. Non-medical professional services firms are a good example. A solopreneur lawyer, accountant, copywriter, or talent agent might only require a laptop, website, and cell phone. A family business where each family member contributes to the final product and sales may be able to support itself. However, in both of these cases, growth may be limited.

Pros And cons

Pros and cons of bootstrapping.

So is bootstrap financing the right option for your business? There are several pros and cons to consider when making a decision.

Pros of bootstrapping.

Self-funding a business allows for complete control of operating and growth decisions, which comes in handy in the following situations:

You have a client you want to drop.

If you're self-funded, the only person you need to convince that you should fire that client is you.

You see an opportunity you want to pursue, like a service-for-equity situation.

The most famous example of this is the artist who took shares as payment to paint Facebook's first office. His share wound up being worth over $200 million.

You have personal values or beliefs that you're not willing to compromise.

This was the case with Chick-fil-A. In fact, the founder has forever forbidden the company from going public so it continues operating within its founding principles.

The dream of DIYing everything is strong.

It's hard to ignore a great story of founders who grew an entire business themselves. Look at Gorilla Glue, which is still a family business, and Qualtrics, which was self-funded by two brothers for 10 years before selling for $8 billion in cash.

Cons of bootstrapping.

Allure aside, self-funding a company can be an uphill battle. One batch of supplies for a big project can exhaust a savings account, particularly when high inflation chips away at your budget, and running a full business as a side hustle can only take you so far. Those, by the way, are just the tip of the iceberg. Here are some other things you risk:

Burning out

Burnout is probably the most common danger of bootstrapped companies because it can lead to serious mental or physical health problems. And it’s not just burnout from long, lonely hours. It’s the stress of liquidating your investments, not getting the deal you were banking on, or simply having no time to yourself. This is particularly risky for business owners who work a day job and build their business during their off hours. While growing a side hustle into a full-fledged business can be done successfully, continuing this way too long can be hard to bear.

Running out of money.

It would be great if money were an unlimited resource, but it’s not. And unexpected expenses or increases in costs can wreak havoc on the best budget. The biggest shock? Sometimes it comes simply from the increased expenses associated with growth. Emergencies like property damage, illness, or other unexpected shutdowns can also thwart the best-crafted plans. If the only fallback is a personal savings account, staying in business may not be practical. Running out of money is one of the main reasons small businesses fail.

Not having the money to take advantage of opportunities.

A lack of capital can limit growth and the ability to seize opportunities, launch products, and take chances. For example:

• You may not be able to upgrade your factory without equipment financing. If you turn it down, your competitor will take it, upgrade their factory, and leave you in the dust. 
• You may be forced to let your best employee walk without taking a business line of credit to offset their new salary demands as your revenue grows. If you don’t pay them what they want, you’ll take a hit on irreplaceable talent, which will eventually affect the customer experience.
• And what if you’re invited to pitch what could wind up being your best client, but you need $20K to do it properly? Without a short-term loan, you may have to pass and always wonder what could have been.

There are solutions.

So what do you do when you’re starting a business but don’t have a large cash reserve? Bootstrapping is still a great option, but you may also want to consider investors or partners. Additionally, there are financing options available to newer businesses, too, that can help a business owner take advantage of opportunities as they arise or even simply be prepared–just in case the money in the self-funded bank account starts to run a little low.

Lendio facilitates financing for small businesses, including SBA loans, lines of credit, cash advances, and more. Learn more about small business loan options for your business.

ROI stands for “return on investment,” and it’s a measurement of how much you earn on the money you spend or borrow. For example, if you buy a machine for $10,000 in January, but having the machine makes you $20,000 by the end of the year, the return on your investment is 200% because you made 100% of your investment back, and then doubled it.

An ROI measurement can be applied to just about anything, from a machine to an employee to a location — or even to  money you might borrow for your small business.

What is Financing?

Financing is money you borrow to move your company forward. You could use financing to hire people, purchase assets, move into new markets, upgrade your technology, or anything else. Regardless of how or where you apply financing, your goal is to eventually have that money produce a positive ROI (is it worth taking otherwise?).

So how do you determine the potential ROI of financing? Here are a few simple steps to get started.

Start by Calculating the Total Cost of Financing

Obviously, there’s the money you’re borrowing. But on top of that will be interest you’ll have to pay as well as any fees. These should be taken into account when you calculate how to break even. 

For example, a $10,000 loan paid over 12 months at a 20% interest rate will take $11,290 in total revenue to break even. The extra $1,090 – that’s your interest. 

BTW, if you don’t have the full loan cost on hand, you can use a financing calculator to figure it out. 

Estimate the Result of Your Financing

How much you’ll need to make is the easy part. The trickier component is projecting how much that single loan or other financing, which could be anything from a line of credit to a merchant cash advance, will produce.

At this point, it’s time to do a bit of educated guessing. And it’s particularly challenging if the financing is being used for multiple reasons because some might yield positive ROI while others might not. But for the sake of simplicity below, let’s say financing is being used for a single specific purchase. Here are a few examples:

• With the new WidgetMaker Plus, a widget manufacturer can make 200 widgets per hour versus the 50 they’re making now with the original Widgetmaker. This will put them in more stores, which will open the market to new customers.

• A second delivery van will let a retailer deliver items to 30 customers per day, an increase from 15 customers previously. 

• Hiring a CFO will give a lawyer more time to get out there and get new clients because they’re spending less time doing administrative financial stuff.

Once you understand how your production will increase with the new investment, you can track your ROI. Increasing production means increasing sales. 

• If the widget maker can make an extra 150 gadgets per hour and sell them for $10 each, then they will make $1,500 more per hour than they could before.

• If the average delivery order for the store is $45, the owner will make $675 more per day by doubling their deliveries. 

• If the lawyer can land one new $12,000/year client a month, they’d make an additional $78K per year.

With these calculations, you can track how much your business stands to profit from spending that extra money. 

Apply the ROI Formula

The good thing about the ROI formula is that it never changes. Once you know it, you can apply it to any money you spend, whether it’s financing or retained earnings. This is the formula:

ROI % = Profit / Investment x 100

So, if $10,000 in financing that costs $11,290 with interest will generate an extra  $15,000 in sales over the course of the year, the profit would be $3,710 ($15K –  $11,290), and the ROI would be $3,710 divided by $11,290 x 100, which comes to 33%.

BTW, if you need a refresher on gross profit and net profit, read this.

What’s a Good ROI for Financing?

So how much ROI do you need to justify financing? Honestly, that will depend on what you’re using the financing for because certain purchases will have different benchmarks.

So, if we go back to our examples from above, the widget maker should expect a double-digit ROI because the machine is a single cost (minus yearly maintenance) and should keep producing ROI well after it’s paid off. 

On the flipside, the lawyer who hires a CFO will probably want to pay top dollar for that CFO and, even with that CFO installed and working, they can’t guarantee that they’ll close a $12K client every month. For that entrepreneur, anything above 0% ROI would be a win.

Whatever your expectations are, this formula is an excellent guide for determining whether or not financing would be generally profitable for your business and so worth your time and investment. 

The Best Way to Ensure Positive ROI on Financing is to Find Affordable Financing

If a certain loan or financing alternative isn’t a good option for your business, consider looking for other financing options that can help you to save. For example, you may find a different short term financing option with more favorable terms. You can also look into credit cards and equipment financing and other alternatives, depending on your needs.

Lendio’s single application can match you with financing options that fit your business and financing plans and goals — plus you can access more than 75 lenders with a single application that takes about 15 minutes to complete. Visit our online lending hub to learn more.

Disclaimer: The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.

Considering small business financing? Whether you're looking for a small business loan, a business line of credit, equity financing, or another form of financing, the process is smoother when you have your ducks in a row before you start.

Why are you applying for small business financing?

Before beginning your application, work through the following questions:

• Why do you need financing?

  There are a multiple reasons to apply for small business financing, and knowing clearly your intent with the funds  can help a finance manager match you to the right product. Are you seeking financing to make repairs, to acquire much-needed equipment, to help your business bridge the gap between billing and invoice? Be sure you know how you'll use the money or credit you're requesting. While you may be able to manage with existing cash flow, a boost in funds could pay for your expansion or act as a just-in-case cushion. Remember, it's always better to apply for financing before you need it, and the terms you qualify for may also be more appealing if you apply while cashflow is strong. 

• How will the capital be used?   

  Lenders will want to know specifics. Are you investing in new equipment? Hiring more employees? Expanding or upgrading your office space? Don’t leave anything out. Specify what the funds will be used for—if you're applying for an equipment loan, state the type of equipment, the dollar amount, even the model and the brand, if you have that information. You’ll also want to articulate why you need these improvements and how will this investments will contribute to the growth of  your business. 

• When do you want/need the funds?

  Don’t wait for a crisis to apply for  small business financing of any kind. Look ahead and plan for growth and protection from potential crises.

• How much will you need?

  This is where you’ll really need to get into the details. Predict what you'll spend by doing research and getting quotes whenever possible. If you’re looking for funding to expand, it may be difficult to know if your financial forecasting is accurate. Take a big-picture view of everything you believe you'll need, then use the financial records you already have and apply this information to your future plans to give you a better idea of what you'll need to borrow.

• What's your ideal repayment schedule?

  There should be two parts to your answer: What is your preferred repayment plan? What happens if Repayment Plan A falls through? What if your sales are worse than projected—what’s your Plan B?

• How healthy is your personal/business credit?

  Your personal credit is just as important as your small businesses’s credit—especially if you’re a startup. If your business is young, lenders will want to see your personal credit as well. And, depending on the lender and the type/amount of loan or financing you're looking for, lenders will likely want to see your personal credit even if you’ve been in business for years. Lenders want to get an overall picture of your credit health. While your personal credit score may seem irrelevant, lenders view it as a great way to determine how you'll run your business

• What are the qualifications/capabilities of your management team?

  You've assembled an amazing team. Make sure you know their qualifications—this collective "resume" can be impressive to lenders.

Your 6-Item Small Business Financing Checklist

Next, it's time to gather the documents you'll need. Having these documents with you when you apply for small business financing can simplify—and speed up—the process.

1. Income Tax Returns from Previous Three Years.

Lenders will definitely want to see your tax returns—business and personal. BTW, the more profitable your small business appears on your tax returns, the easier it can be to obtain small business financing. So if you're planning in advance for a loan or other financing down the line, be sure you consider deductions carefully, particularly if they make your business seem not-so-profitable.

2. Financial Statements and Projected Financial Statements.

Balance sheet, assets, liabilities and net worth—be sure you have your financial statements available. Ensure they're accurate. Lenders will do a numbers crunch, and if you’ve manipulated anything in any way, discrepancies will raise a red flag. Tell it straight. Do your due diligence with the projected financial statements as well. 

3. Personal and Business Bank Statements.

Most lenders want to see both personal and business bank statements. Be prepared to explain any periods where you were low on cash or went negative.

4. Business License and Registration.

Hate paper records? Your business license and registration are probably online if you haven’t kept a physical copy handy.

5. Articles of Incorporation.

Are you incorporated? Have an LLC? Grab those legal documents! 

6. Your Business Plan.

Make sure you write and edit your business plan. Find other experts and professionals to read through it and find holes before lenders find them. You want to make sure you’ve covered everything that lenders could possibly ask. 

Once you've collected everything, it's time to apply. Get started here and see all of your small business loan options in one place, 

The Paycheck Protection Program (PPP) effectively kept the small business economy afloat over the last 15 months, pumping nearly $800 billion into an estimated 12 million businesses across the US. But the PPP loan money ran out just a month after the program’s deadline was extended in March, and those crucially important potentially forgivable loans are no longer available to help small businesses.

Recent months have still not been easy, even with the lifting of restrictions. While many businesses are reopening, the costs of reopening are making for anything but business-as-usual. Supply chains are broken, staffing is tremendously difficult, and this is not the dream reopening business owners had hoped for during the long slog of COVID-19 closures. 

PPP is no longer available, but other forms of loans, microloans, grants, and debt relief are available to your small business. Most of these are administered by the government agency US Small Business Administration, and many are COVID-19 relief programs that offer loan forgiveness or other cost-cutting accommodations that take into account the current economic challenges. Let’s look at some PPP alternatives that could still offer your small business economic aid for any loss of revenue you’ve suffered under COVID-19. 

COVID-19 EIDL

The COVID-19 Economic Injury Disaster Loan (EIDL) “provides economic relief to small businesses and nonprofit organizations that are currently experiencing a temporary loss of revenue” because of the pandemic, according to the SBA. EIDLs had existed before COVID-19, but the program was recently bolstered to provide more economic help for small businesses. Traditionally providing loans of up to $150,000, EIDLs can now potentially triple in size to $500,000, and your first repayment date won’t be for another 18 months. While interest is charged on these loans, it’s a low fixed rate of 3.75% for businesses and 2.75% for nonprofits.

Other relief funds in the EIDL program may be available if you’ve already applied for an EIDL. The Targeted EIDL Advance Grant provides up to $10,000 to businesses with 300 or fewer employees, that can show a 30% loss in revenue for any 2-month period of the pandemic, and are located in a low-income community (you can use this map to determine your community’s status). Similarly, the Supplemental Targeted Advance could provide an additional $5,000 that does not have to be paid back, but it’s only for businesses with 10 or fewer employees.

Other SBA Loans

• SBA Express Loan - The quickest, easiest, and most flexible of these loans, and the SBA responds to SBA Express Loan applications within 36 hours. The funds can be used on working capital, a line of credit, or a commercial real estate loan.
• 7(a) Loans and Microloans - These SBA loans are primarily intended for purchases involving real estate but can also be used for working capital, refinancing debt, or buying furniture and supplies.
• SBA 504 Loan - The SBA 504 Loan is intended to finance large projects that create additional jobs. Funds are meant to finance purchasing or constructing buildings and buying or modernizing facilities. 

Shuttered Venue Operators Grant

This program has worked out pretty well, and most of the fund is still waiting to be awarded. According to the SBA’s mid-July figures, only $5 billion of the total has been awarded, though the SBA has received nearly $12 billion requested in applications. The funds may start to disappear fast.

Restaurant Revitalization Fund

It’s a reminder that as helpful as government relief programs can be, they can still be thwarted by legislative uncertainty. Private lenders may offer less confusion and red tape, and an online lending marketplace can help you find the right small business loan.

Online Small Business Loans

There are a number of factors you may want to consider before taking out a loan. Consider your business’s creditworthiness, whether you’ll be willing to offer collateral, and what your specific plans are for the loan. And do be ready to dig up and present a fair amount of bookkeeping documentation. But you may find other COVID-19 relief for your small business—and maybe without the headaches of previous loan programs.

In 1962, Dun and Bradstreet—a credit company—established the Data Universal Numbering System (DUNS). This unique numbering system links more than 280 million businesses worldwide. 

A DUNS number is a 9-digit identifier that can be assigned to all business types within all industries. Corporations, sole proprietors, nonprofits, and government offices can all use DUNS numbers. 

Learn more about a DUNS number—and how it can help your business. 

Why do I need a DUNS number?

There are many uses for a DUNS number that prove its value. Because there is no cost to requesting a DUNS number, you may want to acquire one now so you have it when the need arises. A few examples of when you will need a DUNS number include:

• If your business wants to pursue government contracts and federal work. 
• If your business is applying for grants through the federal government (especially the US Office of Management and Budget, or OMB).
• If you plan to expand your business globally—and especially if you plan to work with national governments. Some United Nations offices require DUNS numbers when submitting contracts. 

Many American business owners use an Employer Identification Number (EIN) from the IRS as an identifier. While an EIN is useful, it is limited to the United States. A DUNS number can be shared globally, providing greater value as your organization expands. Furthermore, an EIN only identifies the business owner, while a DUNS number identifies the business as a whole.  

How do I get a DUNS number?

You can request a DUNS number from the Dun and Bradstreet Corporation. There is currently no cost to request a number, and the company prides itself on its ability to deliver numbers to companies quickly. You can receive your number in about 30 business days, but the company offers some options to expedite the process. 

If you work for an organization that might already have a moniker, you can use the DUNS number lookup to see if your business is already registered. You can also look up other companies to see if they have registered as well. 

Can I use my DUNS number instead of my Social Security number?

A DUNS number is not a replacement for an EIN or Social Security number (SSN) for lending and application purposes. When you apply for a business credit card or loan, you will need to provide your EIN and possibly your SSN because a business cannot apply for credit, but a business owner—or authorized treasurer—can. 

DUNS numbers serve as supplemental identifiers. To prove your identity, you will need to share additional information. 

Learn when to use your DUNS number.

If you are still unsure whether you need a DUNS number, talk with a business consultant who specializes in your field. They can provide advice as to whether you could benefit from acquiring a DUNS number. 

Because acquiring a DUNS number is free, you may benefit from requesting now—in case you ever need it in the future.

There are multiple financing options for your business. You can seek out short term loans and microloans if you need a small influx of cash quickly, or you can take out large-scale loans to expand and scale your business. Each loan option comes with its own terms and restrictions on the money. 

Another loan option that is particularly popular in real estate is the hard money loan.

What is a hard money loan?

Hard money loans are short-term loans where lenders use collateral like property to back the loan. If the borrower is unable to repay the lender, they can seize and sell the collateral.

You can work with money lenders to secure the funds you need with a short-term payback period. Learn more about these loans and the lenders who issue them. 

Hard money loans are based on collateral.

Hard money lenders don’t look at the credit of the applicant. Instead, they are more interested in the property the applicant is borrowing against. The financial provider wants to ensure the collateral is worth the risk of lending before they approve the loan.

If the borrower can’t pay back the loan, the lender can seize the property. For example, in real estate investments, if a property is built over a sinkhole or lacks any real value, then the lender is unlikely to issue the loan.

Hard money loans are most frequently used by home flippers who want to take worn or damaged property and improve it for a profit. In this case, the land has potential and maybe even a structure built on it.

The home flipper will renovate the property and resell it—typically within a year or two. This is what makes the risk of the hard money loan worth it: the borrower gets the loan to purchase and flip the property while netting the difference when they resell it, and the lender knows that they’ll retain the property if the loan is not repaid.

You can also find people in need of hard money loans outside of the real estate field. These are often considered short-term bridge loans and require substantial collateral to secure the loan.

Do hard money lenders require a down payment?

Hard money lenders typically require a small down payment. This up-front payment is considered their “buy-in” to the loan and ensures they have personal financial assets at stake, too. The down payment or buy-in adds more accountability to the borrower and helps mitigate loan delinquency, which lowers the risk to lenders. 

For example, lenders may require real estate investors to put in 10% to 50% of the property value for a down payment. The amount required will typically depend on the riskiness of the property. 

Some hard money lenders will issue a loan without a down payment, but they might charge other fees or have stricter restrictions to ensure borrowers pay the money back. 

What do hard money lenders charge?

Hard money loans are considered riskier than traditional loans, which is why they are more expensive. Borrowers can expect to pay interest rates of 10–15%, depending on the lender.

The interest rate might also depend on how much your hard money lender is willing to give you. Most lenders look at the loan-to-value ratio (LTV) when issuing funds. They will typically issue 65–75% of a property’s current value. This limit is another reason why borrowers need to be ready for a down payment: lenders won’t cover the full cost of the property. 

Some hard money lenders don’t use the LTV model and instead look at the after-repair value (ARV). This number is the estimated value of the property after it has been flipped. If your lender calculates your loan based on ARV, you will likely get more money. However, this loan is riskier. There is no guarantee that the home will have that market value when the renovations are complete. As a result, these interest rates are typically much higher, close to 18% with extra points added. 

For example, let’s say a flipper wants to buy a property that is listed at $200,000. Using the LTV model, their loan would be around $150,000, which means the flipper needs to bring in $50,000 of their own money plus funds for renovations.

If the lender uses the ARV model, they might place the flipped value of the house at $300,000. This method brings the loan up to $225,000. The borrower now has more money to work with but must cover these extra funds through the resale.

Who are hard money lenders?

Banks typically don’t offer hard money services, which means real estate professionals and other entrepreneurs who need hard money loans will need to turn to private investors. Hard money lenders are often individuals who support business owners or private companies specializing in hard money lending. 

Hard money loans are known for being fast. While it might take up to 30 days to get a traditional loan through a bank, hard money loans can get approved within a few days. This speed allows real estate investors to move quickly when a property hits the market. Traditional banks don’t have enough time to evaluate the level of risk that comes with a property, which is why they don’t get involved in hard money systems. 

Are hard money loans worth it? 

Working with a hard money lender may be your best bet if you run your business in a competitive real estate market. If you have a solid down payment already, you can take steps to build it up and flip it. However, if this is your first foray into real estate, a hard money loan might be too expensive or risky for your needs. 

Shop around to understand the costs of different hard money lenders that you want to work with. This can help you set an investment and renovation budget to start flipping homes for profit. 

Consider other loan options before you borrow.

While a hard money loan might seem like a strong real estate option, other funding options are available if you operate in another industry. At Lendio, we match borrowers with all kinds of loan types, from startup funding to large-scale loans. Visit our online lending center to learn more and to find a financial provider that can help you.