Business Loan vs. Mortgage - Business Loan Blog - Tata Capital

Business Loan vs. Mortgage: Which Should You Choose?

Mar 07, 2017

There are many financing options available for firms in need of funds. Some of them include loans, line of credit, overdraft, debentures, and even mortgage loan that is secured against a commercial property. The two common instruments of financing are loans and mortgage.

It is important to understand the mortgage benefits as well as business loan benefits.

Mortgage

Mortgages are loans that are secured against commercial property. The ownership of the 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 borrowed.

Business loan

Sometimes funds may be needed for various reasons, like investing in equipment, purchasing inventory, opening a new branch, funding daily operation expenses, or for growth and expansion. In order to finance such expenses, firms may avail of a business loan. These loans also help businesses in covering any unexpected expenses. Furthermore, such loans may or may not have to be secured against collateral.

Difference between a business loan and mortgage

  • Purpose

A mortgage is taken for the purpose of acquiring, refinancing, and redeveloping a commercial property. Mortgage loan is approved only if the amount borrowed is equal to or less than the value of the property. Such type of finance is provided with office buildings, industrial warehouses, shopping centers, or business complexes as collaterals.

A business loan, on the other hand, does not necessarily have to be secured against any property. Most lenders now-a-days provide unsecured loans. Hence, even if the business does not have any commercial property, the loan gets approved.

  • Types

There are various types of mortgages such as fixed-rate mortgage, interest-only mortgage, adjustable rate mortgage, and reverse mortgage. All these types of mortgages require collateral.

The various types of loans include line-of-credit loans, secured and unsecured loans, as well as term loans. There may or may not be any collateral against these loans. Thus, businesses may avail of loans even if they do not own any property.

  • Rate of interest

The rate of interest for unsecured commercial loans is higher than that of mortgages. Unsecured loans are costlier as they entail a higher risk than mortgages. Borrowers generally need to have high credit ratings to apply for unsecured loans.

The interest rates for mortgages, on the other hand, are not very high. In case the borrower fails to make payments on his loan, the lender seizes the property that has been kept as mortgage.

There are a number of factors to consider before deciding a particular finance option. Weigh the advantages of each finance vehicle and choose the one that suits your business needs.