Hard money loans and business credit: Do they help or hurt?

Hard money loans are often used by real estate investors and other business owners to purchase real estate or other assets quickly. However, unlike many traditional business loans, hard money loans don't automatically report to business credit bureaus.

Can these loans help your business establish business credit? The answer isn't always straightforward. Learn why here, and find alternative ways to leverage loans to help build business credit.

What is a hard money loan?

Hard money loans are loans that involve using real estate or other property to secure a loan. The word "hard" in "hard money" refers to physical assets that serve as collateral for the loan. These loans are typically secured by real estate and may involve a personal guarantee from the borrower. 

The most common types of hard money loans are real estate loans, where the funding is based on the value of the property, either before or after renovations. These loans are often made by private lenders or specialized lenders that make hard money loans.

There are several reasons hard money loans are popular in certain industries: 

1. The approval process is often fast, and loans may be funded in days if the deal is right
2. Qualifications are often flexible; collateral is often the most important factor in qualifying
3. Credit score requirements are often flexible; good personal or business credit scores may not be required

If the deal is right, hard money loans can provide business owners or real estate investors with funding that would be hard to obtain through traditional lenders.

While these loans may be fast and flexible, there is often a cost. Higher interest rates are common, and these loans may only be available for short-term funding. Unlike a traditional mortgage loan, there may be a balloon payment that must be repaid after a relatively short period of time.

Do hard money loans help or hurt my business credit score?

The impact of hard money loans on your business credit scores depends entirely on whether the lender reports to business credit bureaus. 

Most private hard money lenders do not routinely report payment history to business credit agencies like Dun & Bradstreet, Equifax, or Experian.

If a lender does report your payment history to business credit bureaus and you make payments on time, a hard money loan can often help build your business credit history. However, if you make late payments on a reported loan, it will very likely hurt your credit scores.

The challenge is that many hard money lenders prioritize speed and collateral value over credit reporting infrastructure.

Do hard money loans show up on credit reports?

Hard money loans may or may not show up on credit reports, depending on the lender's reporting practices. Very often, they don’t. 

Many hard money loans are made by individuals or private lenders who make these types of loans and aren’t set up to report to credit bureaus. However, if you get a loan from a hard money lender that operates more like a traditional financial institution, it may be reported.

Ultimately, the decision to report is up to the individual lender. Some factors that influence reporting include:

• Whether the lender is an individual investor or institutional lender
• The lender's relationship with credit reporting agencies
• The size and structure of the lending operation
• State regulations and reporting requirements

When in doubt, ask. 

Check with your prospective lender to find out whether they report to business credit bureaus before you apply if that’s important to you. 

There are other ways to build business credit, though, so you may not have to rely on these loans for credit building.

Do hard money lenders report to business credit bureaus?

Again, the answer is “not often”. 

Many private hard money lenders do not routinely report payment history to major business credit bureaus. Unlike banks and traditional financial institutions that have established relationships with Experian, Equifax, and Dun & Bradstreet, individual hard money lenders often lack the infrastructure or motivation to report borrower payment patterns.

Larger hard money lending companies that operate more like traditional financial institutions are more likely to report to business credit bureaus. These lenders may view credit reporting as part of their risk management and customer relationship strategy.

Pros and cons of hard money for business credit

How to get a hard money business loan

There are a couple of ways to get hard money business loans. One is to connect directly with a hard money lender, which may be an individual who makes these types of loans. Real estate investors may find local hard money lenders through real estate investment clubs or other types of networking.

The other option is to find a hard money lender that works with borrowers in multiple states. These companies often publish their basic underwriting criteria so you can understand quickly whether you may be a fit.

What credit score is needed? 

Creditworthiness isn't always an important factor with hard money loans as with other types of small business loans or financing options. Credit score requirements are usually flexible. And some hard money lenders don't check credit at all.

When there is a credit check, credit score requirements may be lower than typical business loans. Many business credit cards often require a personal credit score of at least 650–680 or higher, but these lenders may extend credit to those with personal scores in the 500s.

Do hard money loans require a down payment? 

While a down payment is often required, some hard money lenders offer 100% financing based on the strength of the collateral pledged.  

More typically, lenders may offer up to 80% of the purchase price. But if you find a very good deal on a property, you may be able to borrow 90% to 100% of the purchase price and 100% of the rehab budget, as long as that total is less than 70% to 75% of the after repair loan-to-value.

Alternatives to build credit

If one of your goals is to build business credit, several alternatives to hard money loans offer credit-building potential:

• Business credit cards: Most small business credit card issuers report to business credit and they're often available to startups as well as established businesses
• Equipment financing: If your business needs equipment, equipment loans or leases may make it easy to acquire assets while building credit through reported payment history
• Term loans: Traditional bank small business loans and online lender term loans typically report to business credit bureaus and offer a fixed amount of money
• Line of credit: Business lines of credit are usually reported to business credit and provide flexible access to capital for ongoing needs
• SBA loans: Guaranteed by the U.S. Small Business Administration, SBA loans often offer good repayment terms and lower interest rates, and payment history is typically reported to business credit
• Vendor credit: Suppliers may offer payment terms, such as net-30 accounts, that let your business buy supplies or services now and pay within 30 days. Use Nav’s net-30 list to find accounts that report. 
• Nav Prime: Build, manage, and monitor your business credit with Nav Prime. You’ll get detailed credit reports and scores from multiple business credit bureaus. Payments submit monthly to major business credit bureaus, which can build your business credit.

The bottom line

Hard money loans can provide essential funding for time-sensitive business opportunities, but they typically don't help build business credit like traditional financing options often do. Most private lenders don't report payment history to business credit bureaus, limiting the credit-building potential.

If you need quick funding and have found a good investment opportunity but don't qualify for traditional financing, a hard money loan may make sense. But if your main goal is to build business credit, you may need to consider alternatives like business credit cards, net-30 accounts, equipment financing, or traditional term loans that regularly report to business credit bureaus.