3 Key Differences Between Commercial and Residential Loans

Posted by:Professionals Finance onMay 24, 2017

Key differences between commercial and residential loans

 

Attaining a loan is the same for residential and commercial properties, right? Well not necessarily. Commercial loans can differ substantially

Three of these fundamental differences are outlined below and should be kept in mind when seeking to find business finance.

 

  1. Borrowing potential

Commercial borrowing potential is calculated differently to residential loans. Rather than using an individual’s income and debt, the debt of the company is held in ratio with the ability of the new property to generate revenue. This is known as the debt coverage ratio (DCR). Most lenders will look for a 1(debt):1.25(revenue potential) ratio when considering commercial loans. Due to this business plans will be necessary when applying and the ability to answer various background questions regarding your business’ operation.

 

  1. Risks and results

Residential mortgages will often take priority over business mortgages if an owner suffers financial difficulties. As a result, lenders will often allow less leeway when it comes to the deposits. Commercial loans require a 10-30% down payment and won’t often accept for low deposit loan options. These loans will also have shorter term lengths than residential loans averaging at only 10-years and have higher interest rates.

 

  1. Prepayment Penalties

Commercial loans may have restrictions on prepayments to protect the lender’s return. If the borrower wishes to settle their debt before the anticipated term end, they may be required to pay prepayment penalties. These conditions will be outlined in loan documents and are often able to be negotiated by your commercial finance specialist.

 

To find our more about our commercial loan options contact us today for an obligation free consultation.  

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