Commercial Loans Secured by Personal Residences and Prepayment Penalties
Many states have laws prohibiting prepayment penalties on non-commercial loans secured by a borrower's home. An individual borrower may obtain financing in his or her own name to use to invest in or establish a business. Because the loan is in the individual's name and secured by his or her personal residence, the loan may appear on its face to be a personal loan. In order to avoid any prohibition on collecting a prepayment penalty, it is very important for the loan documents to recite that the loan is a commercial loan and describe the purpose of the loan, e.g., to acquire a franchise or purchase a business. An even better approach is to have the business entity as the borrower and the individual proprietors as guarantors, pledging their residences as security for their guaranty of the business loan.