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Word Count: 1800 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
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