Many financing options are available for firms that need funds. Some of them include

  • Loans
  • A line of credit
  • Overdraft
  • Debentures, and
  • A mortgage loan is secured against a commercial property.

Therefore, loans and mortgages are the two common instruments that are used for financing.  It is important to understand the benefits of mortgage and business loans to know which one amongst the two he should choose.

Mortgage Loan

  • 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 installments till the completion of the term.
  • Mortgage loans are approved only if the applicant is creditworthy and the value of the property covers the amount of the loan that is borrowed.

Business loan

  • Sometimes funds may also be needed for various reasons like
    • Investing in equipment
    • Purchasing inventory
    • Opening a new branch
    • Funding for daily operation expenses, or
    • Growth and expansion.
  • To finance such kind of expenses, the borrower can avail of a business loan.
  • These loans also help businesses in covering any kind of unexpected expense.
  • Furthermore, such loans may or may not have to be secured against collateral. However, there are various pros and cons of business loans.

Difference between a business loan and mortgage

Purpose

  • A mortgage is taken for
    • Acquiring
    • Refinancing, and
    • 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 centers, and
    • Business complexes as collaterals.
  • A business loan, on the other hand, does not necessarily have to be secured against any property.
  • Most of the lenders nowadays provide for unsecured loans. Even if the business does not have any type of commercial property, the loan would get approved.

Types

  • There are various types of mortgages such as
    • A fixed-rate mortgage
    • An adjustable-rate mortgage, and
    • Reverse mortgage. All of these types of mortgages require collateral.
  • The various types of loans include
    • Line-of-credit loans
    • Secured and unsecured loans
    • The short and long-term loans
  • There may or may not be any collateral against such kind of loans. The businessman can avail of the loans even if they do not own any of the property.

Rate of interest

  • The rate of interest which is for unsecured commercial loans is higher than that of the mortgages.
  • Unsecured loans are costlier as they have a higher risk than mortgages.
  • The borrowers generally are required to have high credit ratings to apply for unsecured loans.
  • On the other hand, the interest rates for mortgages, are 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.

However several factors that are required to be considered before deciding on 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.