3 Common Exit Strategies for Hard Money Loans

Borrowers looking for hard money loans from Actium Partners are expected to come to the table with an exit strategy. An exit strategy is a plan to repay what is borrowed, on time and according to loan terms. Lack of a solid plan could easily mean a loan application is rejected.

The good news is that coming up with a workable exit strategy is not hard for most of our clients. Due to the types of loans we frequently make, there are a number of exit strategies that seem to work well most of the time. For our clients, it is a matter of choosing the right one based on the circumstances of the project at hand.

Though the number of possible exit strategies is almost limitless, here are the three most common:

1. Securing Traditional Financing

Hard money is by no means traditional financing. We do things banks cannot. We do them in ways banks will not. Still, there is something to be said about traditional financing when circumstances are right. Many of our clients utilize hard money or bridge loans in order to fund their projects while they seek traditional financing. The exit strategy is to pay off what they borrow from us using funds from a traditional loan.

One of our favorite examples of this exit strategy involves a client we worked with a number of years ago. We helped the client obtain a piece of commercial real estate in a deal for which time was of the essence. Our loan helped him obtain the property in a timely manner. He then went on to arrange traditional financing, repaying what he borrowed from us and giving him a little extra to invest back into the property.

2. Proceeds from a Sale

Another very common exit strategy is to repay hard money with proceeds from a sale. Given that many of the loans we make are for property deals, we see this exit strategy a lot. We frequently work with investors who buy commercial properties only to improve and resell them.

This particular exit strategy works well if the amount of money loaned is substantially less than the property’s projected value after improvements are made. Why? Because the collateral has to be enough to cover the loan even without improvements. Add the improvements and the property is considerably more valuable. There is now more than enough value to cover the loan we made.

3. Funding from Other Sources

Still another common exit strategy is to utilize funds from other sources. This is often the case when we make a loan that is not tied directly to real estate investment. For example, we may provide a bridge loan to a company looking to expand with a second location.

That client may offer any number of things as collateral for the loan. At the same time, the sale of another asset down the road will provide funds needed to exit. Alternatively, the company may have struck some sort of deal to sell assets to another party, and that deal is just waiting to close. The money for exit will be there upon closing.

The most important aspect in all of this is that an exit strategy is critical to loan approval. We need to know how clients intend to repay what they borrow. If we are confident in their ability to exit on time, that goes a long way toward helping us approve the loan application. On the other hand, we are less likely to approve if we are not confident that the client can exit on time.