If you are a real estate investor, you should not finance your business with loans!
March 08, 2022
As many say, "loans are an indicator of financial difficulties, the risk of using leverage is very high".
When you borrow money to leverage your business, you take the risk that this borrowing help you increase profitability, it can have a multiplier effect on profits, it can help you invest in certain transactions or assets that would limit your investment access due to their high value, and it can even benefit you in times of inflation. Undoubtedly, these are too high risks that not every investor is willing to take. Although we are aware of the real risks that can be taken by those who finance their business with credit, we are sure that knowing the financial instruments available, will help us make better decisions about business finances.
Financial leverage comes directly from the world of finance to explain how to proceed in a situation that is very common: the financing of our company or project, to quickly define this concept is the use of debt to finance a particular operation, what does it mean? Instead of taking our own funds, we use funds from a loan.
This is not the only leverage mechanism, but the main leverage mechanism is debt. Simply put, someone gives us a loan, lends us money, and along with some of our equity, we can finance our business. Since the inception of a business, solid financing has been essential as it is the best way to thrive and succeed. However, in recent years this situation has been complicated by the successive financial crises in the world, which have also affected local companies.
Loans or credit are usually the most common way to finance a business. However, traditional bank financing has declined and given way to other methods. Until 2008, banks provided 90% of business financing and funneled money from savers to them to manage profitability. Now, this vacuum left by bank financing is being supplemented by alternatives that support business lending.
One of them is hard money. This is basically a loan based on collateral rather than the person's financial situation. Instead of securing a long-term repayment plan based on a stable income, a property is used as collateral and the loan is repaid by selling it. This is a real alternative that helps businesses, entrepreneurs and home buyers boost their business and expand their reach. Plus, you do not need a good credit score or savings to get a hard money loan.
It's a simple fact that hard money interest rates are higher than bank loans, but they have to be. Real estate experts do not explain why the interest rates are higher, which discourages many people. Such a loan is considered very risky, so the lender must hedge. It is common for investors to use hard money loans to get a quick cash injection when they need it most. Real estate and tangible assets are used as leverage to secure the loan. Startups needing to outfit their new offices and self-employed individuals in need of cash flow are perfect examples. Even established, successful businesses sometimes opt for a hard money loan instead of a bank loan for speed and convenience.
The word "hard" in "hard money," which is sometimes misunderstood, simply means secured property. Collateral usually means that the property purchased allows for a hard money loan. It means that there is something tangible associated with the contract rather than a long-term repayment. More and more entrepreneurs are looking for ways to ensure the continuity of their business, and in these circumstances, asset-based loans become quite relevant.
In summary, the risk of financing your business with credit is a variable that loses a little weight when we see the myriad benefits of working with external capital. Although it is necessary to understand the dynamics of our business and how much we want to risk, it is an alternative that allows you to continue growing without having to have your own capital.
If you believe you are ready to boost your business and further expand your reach, contact us to guide you along the way and take advantage of the many opportunities in the real estate market. Call or text us at 800-369-2342.