There are many financing options that are available for firms who are in need of funds. Some of them include loans, a line of credit, overdraft, debentures, and one of the option is mortgage loan that is however secured against a commercial property. Therefore, loans and mortgage are therefore the two common instruments that are used for financing. It is, however, important to understand the mortgage benefits as well as business loan benefits so that the borrower is clear as to which one amongst the two he should choose.
Mortgages are the kind of loans that are secured against any commercial property. The ownership of such property remains with the borrower, wherein the borrower agrees to pay regular instalments till the completion of the term. Mortgage loans are thus approved only if the applicant is creditworthy and when the value of the property covers the amount of the loan the loan that is borrowed.
Sometimes funds may also be needed for various reasons, like investing in equipment, purchasing inventory, opening a new branch, funding of daily operation expenses, or for the growth and expansion. In order to finance such kind of expenses, the firms may avail a business loan. These loans also help the businesses in covering any kind of unexpected expenses. Furthermore, such loans may or may not have to be secured against a collateral.
However, the difference between a business loan and mortgage are that:
A mortgage is taken for the purpose of acquiring, refinancing, and for redeveloping a commercial property. A mortgage loan is also approved only if the amount which is borrowed is equal to or is less than the value of the property. Such type of finance is thus provided with office buildings, industrial warehouses, shopping centres, or for business complexes as collaterals.
A business loan, on the other hand, thus does not necessarily have to be secured against any property. Most of the lenders nowadays provide for the unsecured loans. Hence, even if the business does not have any type of commercial property, the loan would get approved.
There are various types of mortgages such as a fixed-rate mortgage, an interest-only mortgage, an adjustable rate mortgage, and also reverse mortgage. All of these types of mortgages, however, require collateral.
The various types of loans thus include line-of-credit loans, secured and also unsecured loans, as well as the short and long term loans. There may or may not be any collateral against such kind of loans. Thus, businesses may, however, avail loans even if they do not own any of the property.
- Rate of interest
The rate of interest which are for unsecured commercial loans is higher than that of the mortgages. Unsecured loans are thus costlier as they entail a higher risk than mortgages. The borrowers generally are required to have high credit ratings in order to apply for unsecured loans.
The interest rates for mortgages, on the other hand, are thus not very high. In case the borrower fails to make the payments on his loan, the lender would seize the property that has been kept as the mortgage.
There are however a number of factors that are required to be considered before deciding a particular finance option. The borrower should always weigh the advantages of each finance vehicle and should then choose the one that suits his business needs.