More residential real estate investors are exploring commercial real estate and business loan alternatives as a result of the increasingly chaotic investment environment for residential financing. In these circumstances prospective commercial property owners, business investors and business owners should educate themselves about choices for the business opportunity financing and commercial loan climate that currently prevails throughout the United States.
There are more key differences between residential real estate investment and commercial real estate investment than realized by most borrowers. Some key factors will be included in this business finance discussion and remaining commercial loan factors will be analyzed in another article. Overall there are more than 20 key business loan differences compared to residential financing.
Stated Income Business Finance Possibilities
Stated income commercial loan programs will preclude the need for personal tax returns to qualify for a business loan. However the stated income commercial mortgage will not change documentation requirements involving income for the business being purchased. In contrast to residential mortgages, no doc (no documentation) loans are not possible for commercial financing.
Down Payment Requirements for a Business Loan
Down payment requirements for buying a business commonly vary from 10% to 25% or more. The specific amount will depend on business experience of the borrower, requirements for business opportunity business finance, type of business and credit scores.
Commercial Mortgage and Business Opportunity Financing - Size Limitations
A commercial real estate loan less than $100,000 is difficult to arrange. $2 million is the prevailing maximum for a stated income commercial loan. Many other business loan options are restricted to $5 million or less.
Business Finance Interest Rates
Commercial mortgage rates are usually above residential financing and rates, and an average range of 8-12% is currently likely. Borrowers can choose between fixed and variable business finance rate options. Business financing involving a business opportunity (without real estate) is likely to include interest rates up to 3% higher than an equivalent commercial property loan.
Personal Guarantors for Business Opportunity Financing and Business Loan
Even though a business is held under corporate ownership, a personal guarantee from the principal owners is routinely required for a commercial mortgage or business loan. This also means that credit scores of the individual business owners will be used as one of the factors to qualify for a commercial loan. In general all individuals owning over 20% of a business will typically be required to personally guarantee a commercial loan.
Business Opportunity Financing - Business Finance Appraisal Requirements
Commercial real estate appraisals are much more expensive and complex than residential appraisals and typically take several weeks to complete. The basis for business loan and commercial mortgage value is primarily based on the income generated by the business rather than an analysis of comparable properties prevalent with residential mortgage loans.
More Business Finance Differences
There are simply too many important distinctions between commercial mortgage situations and residential mortgages to describe fully in this article. Commercial borrowers interested in a more comprehensive discussion about recall or balloon terms for commercial financing, special purpose commercial property financing, refinancing an SBA loan, buying a business opportunity and how to avoid major business financing problems should see the additional reports we have prepared on this topic.
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