What does it mean for you when banks fail? The short answer is: It depends. If you have a relationship with a failed bank, the impact is more direct, but even if you don’t, your ability to borrow can be affected. Fortunately, a hard money loan is a reliable alternative to conventional banks, no matter what’s happening with the banking system or the economy.
Challenges in the Banking Industry
The March 2023 banking crisis, in which multiple banks collapsed unexpectedly, was caused by a combination of factors. Although the crisis was acutely centered around three banks over a short period of time, many of the contributing factors remain, leaving the banking industry on shaky ground and a sense that the worst is yet to come.
Some banks with a high percentage of market exposure in cryptocurrency experienced losses in their loan portfolios. In turn, regulators shut down these banks due to the high risk of this exposure in the wake of the cryptocurrency bubble bursting.
Tech Sector Activity
The expansion of the tech sector during the pandemic prompted some banks to capitalize on these deposits by investing in long-term bonds. Meanwhile, banks were accepting short-term deposits with rates that were higher than the long-term investments. This imbalance came to light with the shift in interest rates.
Treasury Securities and Interest Rates
As interest rates have gone up, the value of bonds has gone down. Although the full bond rate will be paid at maturity, when banks are forced to sell low-yield long-term bonds before the maturity date, the result is a loss. This paper loss, which has the potential consequence of an actual loss, is a risk factor that impacts regulator activity.
Depositors got nervous about banks borrowing money and selling bonds at a significant loss. This resulted in bank runs that forced these institutions into financial jeopardy.
What This Means for Borrowers
Although the collapse of a specific bank may not impact you directly, it can have a ripple effect on the industry. When banks tighten their loan requirements in response to economic turmoil, you might not be able to borrow the money you were counting on for your next real estate investment project, business improvement, or bridge funds. Your needs haven’t changed, but your ability to borrow from a conventional lender might have.
Hard Money Loans: A Reliable Alternative
The money to provide hard money loans comes from private investors and doesn’t depend on the performance of stocks, bonds, or other investments. Loans are not affected by Federal Reserve rates or bank collapses but rather on the supply and demand of private capital. Macroeconomics has an effect on the supply of private capital, but every fund is different.
As a borrower, you also benefit from the fact that hard money lenders are regulated, so the risk to borrow is low. However, lending requirements aren’t as stringent as traditional banks, which means that you can get money for alternative businesses, real estate investments, distressed properties, and other reasons that a conventional lender isn’t allowed to finance. Hard money lenders also move fast. Instead of a 30-plus day closing process, you can get money in five days or less, which is an important edge for many investors.
When you need cash and a conventional loan isn’t an option, hard money might be a good alternative. Hard money loans are backed by real estate, so if you have equity, you may be able to secure financing. As with any type of financial relationship, it’s important to vet the lenders to make sure they are a private fund and not a broker; knowing where the money comes from has a huge effect on your chances of closing.
Secure Your Next Loan with Socotra Capital
If you have an investment opportunity on the horizon, explore your options outside of conventional banking. When you work with Socotra Capital, the application process is fast and easy, and you may be able to close in as few as five days. Because our loans rely on funding from a private capital pool, we can be more flexible with the types of deals we make. If you’re struggling with finding a suitable bank loan, get in touch and let us know what you need.
Get more information about hard money loans and how they work in The Borrower’s Guide to: Process, Preparedness, and Timeline.