Commercial mortgage vs business acquisition loan

People searching “business loan vs mortgage” are comparing two ways a lender can be secured and sized when a business changes hands. A commercial mortgage is lending against a commercial property. A business acquisition loan is lending against the business itself. A purchase that includes the building can use either one, or both. This page sets out how the two differ. It does not say which one a buyer should use.

What a commercial mortgage is

BDC describes a commercial mortgage as a loan secured by a commercial property, which serves as collateral. It is not a home mortgage. The Financial Consumer Agency of Canada describes a mortgage as the loan you get from a lender to help pay for your home, and BDC says banks will not let you use a residential mortgage to buy a commercial property. BDC also says that mortgages are property-specific and require a significant down payment, that commercial mortgages generally have lower loan-to-value ratios and shorter amortization periods than residential mortgages, and that the property can be harder to liquidate.

What a business acquisition loan is

BDC describes senior debt as the bulk of a typical acquisition financing package: a loan secured on the assets of the company. The amount may not be fully secured by specific assets, but the lender has a first charge against assets such as accounts receivable, inventory, real estate and equipment in a recovery situation. BDC calls its version a cash flow term loan. The lending therefore rests on the assets of the business, not on one property. BDC’s line that loans offer broader financing options and may require less upfront capital compares its own commercial real estate mortgage and commercial real estate loan, not acquisition loans. Ask each lender for its down payment and amortization terms in writing.

Where they differ in a purchase

• What the lender takes: a charge on the commercial property, or a first charge over business assets that can include real estate.
• What the money is tied to: a mortgage is property-specific, BDC says, while a senior acquisition loan is secured on the assets of the company.
• What happens if repayment fails: the lender looks to the property, which BDC says can be harder to liquidate, or to its first charge over the assets of the business.
• Which deal it fits: a mortgage needs a property to lend against, so a purchase with leased premises has nothing for it to attach to.

Federal program rules that touch real estate and shares

The Canada Small Business Financing Program guidelines set their own limits. A buyer who purchases real property for the sole purpose of rental is not an eligible borrower. A loan to finance the purchase or improvement of real property is not eligible if the borrower intends to sell, lease or sub-lease the operational area in the three years following the date the loan is made, with an exception for lease or sub-lease by businesses in certain industries the guidelines list. The guidelines also say the acquisition of shares is not eligible for financing, while goodwill is an eligible intangible asset if part of a going concern purchase. Whether a deal is an asset purchase or a share purchase therefore matters to program eligibility. Provincial rules also apply; check where the business is.

Which fits depends on

These are the factors to work through with a lender and an adviser, not a recommendation:

• If the purchase includes the real estate, ask the lender whether it would lend on the property separately from the loan on the business. If the premises are leased, there is no property to charge.
• If the buyer will own and operate from the property, the program’s real-property rules differ from those for a buyer who intends to rent it out.
• If the deal is a share purchase, the program guidelines do not finance it, so check what the lender offers outside the program.
• If much of the price is goodwill, equipment and inventory rather than premises, ask how the lender will take security over those business assets.
• If both facilities are used, compare the security each lender takes and how the two rank against each other and against vendor financing.