Commercial vs Residential Loan Terms Compared

Residential loan terms and commercial loan terms are similar in some aspects, but they tend to vary in terms of rates, lengths and application considerations. On the whole, residential mortgages are provided to individuals and families with the ultimate goal of owning the property out right, living debt free and catering the property to their specific needs. Commercial loans, on the other hand, have different goals. They are designed to reduce the cost of maintaining a storefront, operating a business and fill gaps between revenues and expenses. Because the purpose of the loans are different, the loan terms will also be different.

Residential Loans are Shorter

Most residential loans are shorter than commercial loans. Commercial enterprises are not as concerned with owning an asset outright as they are with keeping operating costs low. As such, commercial borrowers will often continue to lease until it makes more financial sense to buy. On the other hand, residential owners are more likely to seek ownership as soon as possible. They often have personal motivations rather than only financial motivations to desiring ownership.

Residential Loans Have Less Strings Attached

Residential borrowers, for the most part, maintain the flexibility to take on more debts and modify their property while they are contracted with a mortgage lender. On the other hand, commercial loans often come with more strings attached. When a business or commercial enterprise is funded, the lending institution reviews the business's financial planning agenda and business plan. They want to assure the business will continue to be profitable. If the commercial borrower is going to alter that plan, take on investors, take on debts and make other changes, it could run the risk of violating the original loan contract.

Commercial Loans Require Business Plans

Since a lender is evaluating not just current but potential profits with a commercial borrower, a business plan is as important as a credit score for a commercial loan. Residential borrowers will have to show a good credit score and high enough income to cover debt obligations. It helps if they have a stable salary in a profitable industry, but this is not as much of a requirement. Commercial borrowers, on the other hand, need to show why their business will continue to succeed in the future to be considered for continual support from lenders.

Commercial Loans are Permanent

Permanent may be a strong word, but most commercial borrowers do need some form of permanent financing in place in order to succeed. Long-term financing for a business will cover gaps in accounts receivable and accounts payable. This means, essentially, that a business needs long-term financing to keep paying bills even if clients do not pay on time or if sales are slow in a given month. Nearly all businesses run on a cycle of debt, going into debt to expand and then making profits back later. Residential borrowers want out of debt quickly. Commercial borrowers, on the other hand, may be in debt until the day they sell the company or stop operating as a business.

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