Hard money is a form of private lending that leans heavily on collateral to secure loans. In essence, hard money lending is asset-based lending. If the value of the asset being offered as collateral has enough value to cover the lender’s risk, approval is likely. A best-case scenario involves offering real estate as the collateral.

Salt Lake City’s Actium Lending explains that most hard money loans fund real estate transactions. There are some exceptions, like business expansion and debt reorganization, but most hard money borrowers are real estate investors who use loans to acquire new properties.

As you might expect, the properties they purchase act as collateral on the loans they take out. It is the perfect arrangement. High-value collateral keeps lenders happy. When collateral is the property being obtained, borrowers don’t have to put up something else. It’s a win-win.

Fast Access to Capital

Real estate is an excellent form of collateral for hard money loans. There are several reasons explaining why, beginning with the fact that it gives borrowers fast access to capital.

Remember that hard money lending is asset-based lending. As such, lenders do not have to spend weeks researching a borrower’s credit history, income, etc. A lender really only needs to look at the collateral and its value. That can be done in days, if not hours. It doesn’t take hard money lenders months to complete underwriting. In fact, most approved loans are funded inside of a week.

Hand-in-hand with speed is flexible lending criteria that allows hard money lenders to be less stringent. They can take on projects that traditional lenders would steer clear of. Hard money lenders can also find their way to loan approval without nearly as much documentation. Why? Because collateral value is the single biggest factor in the approval decision.

Higher Loan Amounts Are Possible

Hard money lending being asset-based often translates into higher loan amounts. This is yet another advantage of offering real estate as collateral. Consider commercial property. It tends to be worth a lot more than its residential counterpart.

Even with a comparatively low loan-to-value (LTV) ratio, a commercial property worth hundreds of thousands of dollars can be leveraged to obtain a sizable hard money loan. A property worth millions could mean more.

The other side of that coin is traditional lending. It is based more on the borrower’s perceived ability to repay than the value of his assets. The more said ability is questioned, the lower a proposed loan’s value is likely to be. In simple terms, it is tough to get a loan in the neighborhood of $1 million based exclusively on one’s ability to repay.

Earning Higher Returns

Real estate investors appreciate asset-based lending because it allows them to turn high value properties into higher returns. Think of it this way: high-yield opportunities are not always easy to come by. When they present themselves, investors need to be ready to jump. Hard money gives them the opportunity to do so. And it’s all made possible by the equally high value of the property being acquired.

I could keep going with many more examples illustrating why real estate makes for such good collateral in hard money lending. Yet the point has already been made. Real estate has an inherent value that lenders trust. They find collateral a lot more trustworthy than a perceived ability to repay. That’s really the long and short of it.

If you have ever considered applying for a hard money or bridge loan, be aware that collateral makes all the difference in the world. Real estate is your best option.