With the increasingly chaotic investment climate for residential financing in the United States, more residential real estate investors are exploring commercial real estate and business finance opportunities. It is important for prospective commercial property owners, business owners and business investors to educate themselves about options for the business loan and commercial mortgage environment they will be facing.
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 Commercial Mortgage Opportunities
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.
Commercial Mortgage Down Payment
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
It is very difficult to obtain a commercial mortgage less than $100,000. A normal maximum for a stated income business loan and SBA loan situations is $2 million. A number of other business finance programs are limited to $5 million.
Commercial Mortgage Interest Rate Expectations
Business finance interest rates are commonly more than residential financing interest rate levels, with an average current range of 8% to 12%. It is usually feasible to have variable and fixed business loan rate choices. Financing for a business opportunity will usually have higher interest rates which are generally in the range of 1-3% more than a similar commercial mortgage.
Business Finance and SBA Loan - Personal Guarantors
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 Loan and Commercial Mortgage Appraisals
It is normal for commercial property and business opportunity appraisals to require over a month to complete. Commercial appraisals are much more complex and expensive than residential appraisals. Business opportunity financing and commercial loan value is traditionally based on business income rather than a comparable property analysis used in residential appraisals.
More Business Finance Differences
The many differences between residential financing and business loan requirements cannot be described appropriately in an individual report. We have prepared separate business finance reports to discuss additional issues such as SBA loan refinancing, how to eliminate typical commercial loan problems, recall and balloon conditions for business financing, special purpose commercial properties and financing to buy a business opportunity.
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