Why Is Commercial Finance More Expensive?

Commercial finance provides businesses of all shapes and sizes with access to essential funding for almost any legal purpose. Where available, commercial finance rates are usually slightly higher than those of a conventional residential mortgage.

For a rough idea of what to expect, use our helpful commercial finance calculator to see how commercial finance works in practice.

Where commercial finance rates and/or borrowing costs in general exceed those of conventional borrowing by a significant margin, particularly when it comes to mainstream lenders as opposed to specialist commercial finance providers, there is often a reason why, but what is it about commercial finance that makes it a costlier financial product than a comparable conventional loan?

Elevated risk for the lender

One of the factors that contributes to the higher costs of commercial finance is the elevated risk for the lender. Commercial finance is considered slightly riskier in the sense that the borrower’s ability to repay is often based largely on the performance of their business.

As there are no certainties in any sector or line of work, there are no concrete guarantees the business will be able to keep up with its repayments long-term.

This risk is, however, largely augmented by the provision of adequate security to cover the costs of the loan. This is also why the security a lender may request to cover the costs of a commercial loan would need to have a higher combined value than those used to cover a more conventionally secured loan.

Different types of commercial finance

Commercial borrowing costs can also be affected by the type of commercial finance the business or individual applies for. In some instances, commercial finance is applied for and accessed in the form of an overdraft, in which case the borrower can expect higher overall borrowing costs than a similar applicant taking out a commercial loan from the same lender.

Competition also plays a role in establishing commercial finance rates and overall borrowing costs. There is not quite as much competition in the commercial lending landscape as in the residential mortgage sector, which means lenders do not have to be quite as competitive with the rates they provide.

Along with these factors, additional considerations like the applicant’s credit history, the performance of their business to date, their business acumen, and so on may all influence the competitiveness of the deals they are offered.

In most typical cases, commercial finance costs at least slightly more than conventional borrowing.

Independent broker support

Irrespective of how much you intend to borrow and your intentions for the funds, seeking independent broker support at an early stage is essential. This will enable you to not only compare as many options as possible from specialist lenders across the UK, but also present your case in such a way as to open the door to competitive rates.

For more information on any of the above or to discuss your requirements in more detail, call anytime for an obligation-free consultation with a member of the team.