Commercial Loans vs Residential Loans

If a start up business has the option to pursue a residential loan to obtain the money they need for their business I will always recommend that first. For example: If a borrower needs a $200,000 loan and they have the equity in their home or other assets to meet that need, I recommend a second mortgage or refinancing the first. It may also be wise to get personal loans on automobiles as well.

Cash is “king” for any business. Cash flow is often referred to as the life blood of a business. The rates and terms for commercial loans are much more constrictive than residential or consumer financing. Currently 30 year fixed rates on a residential mortgage are 3.5%. Commercial rates are only fixed for 5 years are float around 5.5% currently. That is a 2% premium you will pay for a commercial loan over a residential. In addition, the residential mortgage will be amortized over 30 years and commercial loans can be as low as 20 years and range to 30 years on real estate. Business equipment loans are normally 5-10 years in length.

Here is what happens to your payment:

  • Residential loan of $200,000 @ 3.5% rate fixed for 30 years: PMT $898.09
  • Commercial Real Estate Loan $200,000 @5.5% rate for 25 years: PMT $1,228.17
  • Commercial Equipment Loan $200,000 @5.5% rate for 10 years: PMT $2,170.53

The cash flow savings is significant. Lenders require a personal guarantee so your home would be on the line in the event of a default regardless of whether a loan is for your business or against personal assets. In addition, residential loans typically don’t have prepayment penalties like commercial loans do.

The trick is that consumer financing does not like to fund business loan requests. In many cases consumer financing is not an option, but when it is, you can save big by utilizing personal resources instead of leveraging a commercial lender.

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