Commercial Lending vs. Real Estate Lending
Data suggests that losses endured on commercial loans, on average, exceed the losses realized on real estate loans. But because of the regulatory cap placed on real estate lending, commercial loans are a reasonable substitute.
Commercial lending is a bit more specialized. Oil and gas lending, account receivable/inventory financing, floor plan lending, and lease financing all are examples of commercial lending, and all require some type of knowledge to lend reasonably.
Real Estate Lending
Real estate lending provides an incorrect sense of security because the real estate can’t disappear. Commercial loans, however, are collateralized by assets that are more mobile and, as a result, require much more “hands on” monitoring. Whether it be aging reports, floor plan inspections, reserve engineering reports, etc., commercial loans require constant documentation and monitoring in an attempt to ensure that the collateral – often the primary source of repayment – is still viable. Furthermore, efforts need to be made to intermittently verify that the documentation provided to the bank is correct. This may require that the bank engage a firm to assess the borrower’s books and records on an intermittent basis. Or the bank may hire a firm to produce records (hiring a firm to provide reserve engineering reports).
Because documentation is a more critical component of commercial lending, interest rates charged for commercial loans are higher than typical real estate loans.