Key Differences between a Mortgage and a Small Business Loan
Guest Post by Charles Bailey
Initially, the application process for both commercial and residential loans may appear similar. Both processes include the review of credit history, existing debt and income. However, where a residential loan is determined on the strength of its collateral to acquire property, a commercial loan stands alone as an investment in business growth.
‘An investment in knowledge pays the best interest’ – Benjamin Franklin
Knowing the Difference
Open ended loans are loans that have a continued line of credit, like a credit card. This means that as you repay your debt, credit is continually available, assuming that you are not exceeding your limit and meeting repayment instalments. Closed loans are set amounts that are applied for with a set end date and any subsequent line of credit must be applied for individually.
Open Ended Loans:
- No fixed term
- Roll over credit
- Can have mutual lines of credit
i.e. credit card
Closed Loan (term loans):
- Fixed term
- Specified end date
- Individual application required for subsequent credit
i.e. mortgage, commercial loan
A secured loan (mortgage) is tied to property. Whether it is land, investment property or personal residence, a secured loan will always be backed by some form of collateral. In this case, a mortgage is a form of a secured loan with the house itself acting as collateral.
Unsecured small business loans, on the other hand, stands with no collateral and therefore can incur higher interest rates. Higher interests rates are directly linked to the risk associated with the loan. When a loan is unsecured- without collateral- the risk is automatically higher.
Making the Most of Non-Bank Lenders
‘There’s a way to do it better – find it’ – Thomas Edison
Non-bank lenders are privately owned companies that award loans to a range of small businesses. In a market that has previously been monopolised by the big banks, the non-bank lenders are a fresh alternative creating opportunity for innovative thinking.
Pros of Non-Bank Lenders:
- More flexible approach
- Competitive terms
- Higher risk return
So, which Loan is Right for Your Needs?
‘Risk comes from not knowing what you are doing’ – Warren Buffet
Before you can determine which loan is right for your business, you need to understand your vision. This process is called preparing your business case.
Business Cases and Commercial Loans
Providing a clear and professional business case sets the tone for your business and provides the lender with a sense of security in your ability to assess and analyse market and risk. A business case typically consists of, but is not limited to:The
- business’ history
- The aim of the business plan
- Relevant market information
- Risk analysis and
- Financial forecasting
Writing a business plan gives the lender a complete picture of their investment.
‘Excellence is a conscious process, and not an accident’ – Abdul Kalam, former president of India
Most application process’ can get to even the most determined of budding entrepreneurs. Research shows that new businesses who do not take the time to factor in work-life balance have a higher burn-out rate than business that prioritises it. Taking care of ‘you’ becomes part and parcel with taking care of business. To that end, make sure you have:
- Allow reasonable time frames
- Create a support system
- Create boundaries
‘The richest people in the world look for, and build, networks. Everyone else looks for work.’ –Robert Kiyosaki
Keep your finance goals realistic and keep yourself informed. Understanding commercial loans and the relevance of non-bank lenders, along with familiarising yourself with terms, options and viable strategy will arm you for success. Whether you are investing in your first property, opening a small business or creating a franchise: know what is right for you and your business.
“When you find a job that you love, you will never work a day in your life’ – proverb
About the Author
Charles Bailey writes about small business finance for Authorflair from personal experience. A successful property investor and an entrepreneur in Australia and New Zealand he is motivated to share his insights and writes for several publications in Australia and abroad.