7 Ways Business Loans Differ From Commercial Mortgages
Whether an enterprise has just started or is looking to expand upon years of work, business loans and commercial mortgages are necessities. They provide funding for major purchases and day-to-day operations. However, they differ in some major ways. Here are some of the differences:
1. Interest Rates
Mortgages are always secured with collateral (i.e., property) that the lender can seize if the business owner defaults. Because of this, mortgages tend to carry lower interest rates than business loans, which may or may not be secured. Without the guarantee of repayment, a lender is in a high-risk situation. High risk equals high rates.
2. Loan Security
As mentioned above, mortgages are always secured, and business loans may or may not be. New businesses should be aware that they will likely only be eligible for secured loans as they have not proven themselves yet. Once a firm is more established, an unsecured loan may be within reach.
Mortgages have a specific purpose: to fund the purchase or development of a property, such as an office building, hotel or complex. Business loans have varied purposes. Common reasons for requesting a business loan include buying equipment and inventory, opening new locations and funding daily business.
A business must own property to be eligible for a mortgage so the lender has guaranteed collateral. That is not required for a business loan. Instead, qualifications center on creditworthiness, responsibility and planning.
5. Term Length
Mortgages tend to be long-term commitments, sometimes taking decades to pay off (and carrying penalties for prepayment). Business loans can be short-term, lasting for less than a year. This means firms are likely to seek multiple business loans over the years as they set new goals.
Typical examples of business loans are line-of-credit, balloon loans and installment loans. Commercial mortgage options may be similar to residential mortgages, with fixed-rate, interest-only and adjustable rate loans being standard.
For both business loans and mortgages, lenders review an applicant’s income, debt and credit history to determine their ability to repay the loan. Then the loans are either secured or unsecured, based on the aforementioned criteria. However, when it comes to determining the value of the loan, there are differences. Mortgages require appraisals, while a business loan’s value is dependent upon its purpose and the requester’s financial profile.