Aman has a prosperous garment manufacturing unit. His company produces the most stylish women clothing in town. He exports these garments to places like Dubai, the UK, and other European countries. They are in high demand in these places. Aman’s company has an export financing arrangement with a local bank. The company has a good credit history with no instance of default in repayment.
Aman has earned a reputation for bringing in the latest fashion to town. The festive season is the peak season for the garment manufacturing industry. One day, Aman receives a telephone call from the biggest garment retailer in India. They would like Aman to supply some of the samples from Aman’s unit. Aman sends some of the best designs as samples. The garment retailer approves the samples and places a massive order.
Aman is in a dilemma. He cannot ask the retailer for an advance. The retailer is a reputed one that does not give advance to its suppliers. They do not have the practice of opening letters of credit either. Under such circumstances, Aman does not know what to do. He does not have the money to purchase the raw materials. He does not want to let go of the order as well.
Sensing that some issues are troubling Aman, his bank manager enquires the reason for his aloofness. Aman confides that he is in a business dilemma. The bank manager is also Aman’s friend. He listens with full attention as Aman pours out his troubles. Aman seeks his advice in the matter.
The bank manager says that the bank will not be in a position to approve temporary limits because such orders are one-time occurrences. Aman has to continue with the same limits. However, the bank manager casually asks him whether Aman has any other property in his name. Aman replies in the affirmative stating that he has another house in the same town. He has let out the property to a tenant and receives rent for the same.
Aman’s bank manager asks him to Apply for Loan Against Property. Aman has never heard about this product before. Aman seeks clarifications about this novel product, “Loan Against Property (LAP).”
A LAP is a secured loan that some banks give against equitable mortgage of property. Usually, borrowers do not have to specify any particular reason for applying for LAP. However, they have to if they wish to avail this facility for business purposes. The idea is that the business enterprises get benefits in income tax payments if they declare and obtain LAP for business purposes.
• The applicant should satisfy standard KYC norms.
• The borrower should have sufficient income to repay the LAP instalments
• The borrowers should have property (vacant, self-occupied, or let out) in their name
• The property should be free from any encumbrances
Banks have their products. Some banks have overdraft facilities whereas some banks give term loans against properties. Aman’s bank has both the products. Aman opts for the overdraft facility. It is because Aman would not need funds as a lump sum amount. He requires the amount in stages. The overdraft facility is the ideal one for him.
Due to his busy schedule, Aman doesn’t want to go through the tiring traditional process of application. So, he searches the LAP product on the internet and comes across MyMoneyMantra, India’s first loan service provider. He fills in all the required details and gets a call from MyMoneyMantra’s Mortgage Specialists within a short time span.
The specialist connects him to the bank that has the perfect product for him. The bank has to complete the following formalities before approving the facility.
• Get the required documents from him, including – income proof, ITR, identity proof, business stability proof, residence proof and others.
• Do a credit check of Aman’s company as well as Aman with the major credit bureaus to obtain their credit history.
• Conduct a physical inspection of the property to be mortgaged
• Evaluate the property
• Establish the legal title of the property to ensure proper creation of equitable mortgage
Aman submits the details of the property and the latest encumbrance certificate to the bank. They do a legal search and establish Aman’s right and eligibility to mortgage the property in the bank’s name. The evaluation of the property is also over. Banks can sanction a maximum of 70% of the value of the property (also known as Loan-to-Value or LTV). In Aman’s case, the amount is enough for him to meet his customer’s demand in the peak season.
Aman executes the order flawlessly and makes a neat profit in the bargain. On realising the proceeds of the transaction, Aman closes the loan account and releases his property. Fortunately for Aman, the LAP product helped him secure and deliver a big order. If you are ever in a similar situation, you now know what to do.
Also Read: 9 Factors That Affect Your Eligibility for a Loan Against Property
Reshma Rawat is a passionate writer with a decade of experience in writing for a variety of domains (finance, technology, lifestyle, e-commerce, real estate, etc.). Currently, she is working as Assistant Manager - Content @MyMoneyMantra and writes blogs & webpages on financial products (loans, credit cards, insurance, government financial policies, mutual funds, etc.).
Director- MyMoneyMantra FinTech| A senior retail and commercial banking professional, adept at handling Business Development, Sales Planning & Growth, Product Strategy, Marketing Operations and Client advisory services phygitally.
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