Although much business lending takes place through established, reputable financial institutions such as banks, sometimes traditional criteria are hard for a business or individual to meet. Creative borrowers and lenders can create their own loan criteria and terms, circumventing the protocols and regulations that traditional lending institutions must follow. A traditional loan through a certified lending institution is sometimes referred to as a "soft loan." In contrast, a hard loan is generally awarded by a private individual or investor, and its terms and interest rate may be more stringent than those of a bank.
Why Borrow Soft Money?
Soft money is a safe bet. It is loaned by a reputable institution and its interest rate is likely relatively low because you have met the criteria that traditional banks require, such as strong credit history and sufficient collateral. Other terms such as repayment schedules also tend to be reasonable and sustainable, unlikely to jeopardize the financial health of your business or your personal assets. In addition, soft money loans are recorded and easily traced. They become part of your personal credit history, enabling you to build a solid credit score.
Why Borrow Hard Money?
If your credit score and financial history are less than stellar, a hard loan may make it possible for you to achieve your financial goals despite these obstacles. Although the interest rate may be higher and the repayment terms more stringent than a soft loan, obtaining hard money can make the difference between being able to borrow the money to realize business or personal goals and being unable to secure these sums. Hard money lenders think outside the box, and this approach may suit you if your financial situation includes challenges that require creative approaches.
Hard and Soft Similarities
Both soft loans from banks and hard loans from individuals involve eligibility criteria and repayment terms. Regardless of who agrees to lend you money, the lender will expect to be repaid and will want to know how and when this repayment will occur. In addition, both hard money lenders and soft money lenders have contingency plans for protecting themselves in case you fail to repay the sums you owe. Collateral is a common contingency plan for both soft and hard loans, requiring you to pledge personal assets to back up loan amounts in case of failure to repay.
Hard and Soft Differences
Because banks are subject to government regulations -- more tightly than ever since the financial crisis that began in 2008 -- you may be unable to secure a soft loan if you have disappointing credit, even if you have the assets and the income to repay the amount you seek to borrow. In contrast, lenders providing hard loans are accountable only to themselves and their business partners. If they are confident of your ability to repay a borrowed sum, they have the discretion and the authority to lend it to you.
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