What Is the Difference Between a Commercial Business Loan and a Residential Owner Loan?
You can use a residential consumer loan to finance or refinance a residential property. You can use a commercial loan to finance a building, a vehicle or another type of collateral and some commercial loans are even unsecured. Aside from the differences in terms of collateral, there are many other differences between residential consumer loans and commercial loans.
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Credit
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When you apply for a residential consumer loan, the lender obtains a copy of your personal credit report from at least one of the national credit reporting agencies: Equifax, Experian or TransUnion. When a business applies for a loan, the lender normally obtains a business credit report that details the entity's borrowing history. However, many lenders also require the business owners to guarantee the loan. This means the business owner has to assume responsibility for repaying the debt if the business defaults on the loan. The lender check's the guarantor's personal credit report to ensure that the borrower has a good enough credit to qualify as a guarantor. Therefore, on many commercial loans, the lender checks the credit of a party other than the borrower.
Capacity
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When you apply for a consumer loan, the lender compares your income with your monthly debt expenses. Your debt-to-income ratio details your monthly debt payments as a percentage of your monthly income. You cannot qualify for a loan if your DTI ratio exceeds an acceptable level as defined by your lender. With a business loan, the lender checks the DTI ratio of the guarantors but also examines the company's cash flow. A business cannot qualify for a loan unless its income exceeds its liabilities. However, lenders also typically require commercial borrowers to have some cash reserves to ensure that the business can continue to repay the debt even if its revenue decreases.
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Recourse
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If you default on a residential mortgage, then the lender can foreclose on your home. Likewise a lender can foreclose on a collateral secured business loan and sell the collateral to settle the debt. However, if you signed a business loan as a guarantor, then the lender can pursue you for the remainder of the debt if the foreclosure sale fails to raise enough funds to cover the outstanding loan balance. Well-established businesses do not need to have loan guarantors. A lender cannot pursue the owners of a corporation if the corporation defaults on a debt unless those individuals guaranteed the loan. Rules pertaining to the liability of the owners of other entities vary from state to state.
Rescission
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When a business takes out a commercial loan, the loan agreement takes immediate effect. If you refinance a residential mortgage with a new lender, then you are entitled to a three-day right of rescission during which you can cancel the loan agreement. This rescission period excludes Sundays and federal holidays, but the loan does not take effect until this period has expired. Other types of residential mortgages such as purchase loans work in the same way as business loans and take immediate effect after the loan closing.
Terms
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Conventional residential mortgages have term times of 15 or 30 years. However, many lenders also offer home loans with terms of five, 10 or 20 years, and many of these loans take the form of credit lines rather than installment loans. Commercial loan terms vary greatly based upon the collateral being financed and the size of the loan. Many business loans take the form of balloon loans that consist of an interest-only period followed by a lump sum payment. Some lenders also offer balloon loans to consumers although these loans are more commonly used by commercial entities.
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