For the last year, every business news channel has covered rising interest rates and the impact on different groups of people. The commercial real estate sector continues to see changes in lending related to higher interest rates. Commercial lending differs from residential mortgage lending in several ways, but it still remains a challenge to secure the financing for business ventures that was once easier to obtain.
How commercial lending differs from residential
Commercial lending is different from residential lending in 4 main ways: qualification, source of loan, interest rate, and amortization.
Qualification for a loan generally depends on the property itself and the potential income the property generates. The more income potential, the less personal income will be a factor in securing the loan. Conversely, in residential lending, a loan depends greatly on a person’s income. Approval for a commercial loan can be tricky to navigate for a first-time investor. Banks will provide a loan applicant checklist for entrepreneurs to use. This checklist will be essential to securing a loan through that institution.
The source of the loan for commercial banks is generally a local, community bank. It’s important to establish a relationship with a local bank or credit union in advance.
Interest rates for commercial loans are often higher rates than residential loans. Additionally, they are general a variable rate loan that can fluctuate as the interest rates change. This can impact your mortgage payment on the loan frequently and should be an important detail as you grow your business.
Amortization periods for commercial loans typically are shorter for commercial loans that will mean higher monthly payments. Whereas a residential mortgage can be a 15 or 30-year term, the commercial loan industry is shorter and will result in higher payments.
Now that we have covered the differences in commercial lending versus residential, let’s consider briefly the impact that higher interest rates are having on commercial lending.
Entrepreneurs and business people are still borrowing money and building commercial properties far and wide. While some parts of the country may see less development than others, one doesn’t have to look far to see new developments popping up on the landscape.
One of the most significant challenges with interest rates in the last 12 months is that it becomes difficult to predict what’s coming. With residential mortgages, as the interest rates change, you can still know what a loan interest rate will roughly be on any given day. With variable rates on commercial loans, there’s not a solid way to predict what’s coming other than for the foreseeable future, rates are going up. This article from propmodo.com provides great insight into the tumult of the commercial lending industry currently. Honestly, after reading it, it seems like there should be a better way, no?
While commercial lending can be confusing, local banks are still extending loans to businesses across the country. If you’re ready to dip your toes in on a commercial venture, don’t be discouraged that it’s not possible or not the right time. With the right business idea and profitability structure, banks are still lending even if they’re doing it more selectively.
At Weaver Realty, we have a team of experts we work with to help our clients secure the funding needed for their next project. We would love to work with you. Call us today at 904-733-0039 and experience the Weaver difference.
