Among the many ways that hard money lenders market themselves is talking about speed. These lenders can typically do in days or weeks what banks struggle to get done in months. It could take a bank up to a couple of months to approve a small business loan where your typical hard money lender can get it done in a week or less.
So what’s the deal? Why are banks so much slower? It has to do with a number of things, including lending requirements and the actual underwriting process. According to Salt Lake City’s Actium Partners, hard money lenders are not shackled by the same laborious procedures.
When Application Is Made
The first step in applying for a small business loan is to compile all of the necessary documents. Banks will typically include a list of required documents along with their applications. It can take small businesses quite a bit of time to compile everything. This much isn’t the bank’s fault, but some banks will not even look at an application until all of the documentation is submitted.
Banks often recommend that lenders compile all the documentation well ahead of time. However, this doesn’t necessarily guarantee a loan will be funded any faster. The bank still has to go through its process.
Underwriting the Loan
Once an application is received, it goes from loan officer to underwriter. A loan officer goes through the preliminary process of verifying the application is filled out correctly. They also peruse the submitted documentation to make sure everything is in order. If it is, the application heads to an underwriter.
It is the underwriter’s task to go through all the documentation piece by piece. The underwriter checks the borrower’s credit history, contacts references, and so forth. They ultimately decide whether or not the borrower is trustworthy. A loan is approved only with the underwriter’s blessing.
From there, the loan has to actually be written via legal documentation. That documentation must then be sent to the borrower for signatures. Finally, the loan can be funded and closed. Note that it takes time for the underwriter to do what he or she does. Remember that every detail in the borrower’s supporting documentation has to be checked.
Priority to Larger Businesses
Another thing to consider is that banks, like any other business, give priority to those customers who make them more money. This is why they prefer corporate lending over small business lending. A typical small business loan is for $500,000 or less. Corporate loans are much bigger.
The reality is that a bank will put its time and efforts into corporate lending first. If there are two loans on the table at any given time, the corporate loan will be processed before the small business loan. That is just the reality.
Hard Money Lenders Are Faster
So how do hard money lenders work so much faster than banks? First and foremost, they do not require a ton of documentation from applicants. They make their lending decisions based primarily on collateral. As such, there is a lot less paperwork to go through. This alone saves considerable time.
Hard money lenders also write loans themselves. There is no underwriter involved in the process. Everything is handled in-house by one or two individuals. Hard money lenders are also able to fund within 24 to 48 hours, which is just the icing on the cake.
Now you know why banks take so long to approve and fund small business loans. If you do not have the time to wait, you might be better off with hard money.