Is Using a Loan Against Property as a Business Loan a Smart Choice?

Consider These Factors Before Using Your Property to Get Loan for Business Purposes

Size of the business:

Banks give Business Loans for Various Purposes. It can be a term loan for acquiring machinery or setting up a plant. It can also be a running loan account for working capital purposes. Banks look at the turnover of the business and process the loans based on your projected annual turnover. Usually, the working capital loans are around 20% of your projected annual turnover. The machinery loans depend on the cost of the machines you wish to acquire. Banks can go up to 75% to 80% of the value of the device. However, they calculate your repaying capacity based on your turnover.

Nature of property available as collateral:

Residential, commercial, or industrial properties should not be a problem. However, note that banks do not accept agricultural property as collateral. You can also check different features and benefits of taking a Commercial Property Loan Online.

Value of collateral:

When a bank gives a Business Loan secured by adequate collateral, you usually get up to 100% of the value of the property. However, if you go for the ‘Loan against Property’ you will not receive more than 60% to 80% of the property value as the loan. Check out whether the loan amount will suffice for your business needs. Underfinancing can be dangerous.

Size of the loan:

If you are looking for a smaller loan, a Personal Loan should suffice. You need not provide any collateral. However, if your requirements are significant, you need to Apply for a Loan Against Property.

Explore other options:

The Government of India has set up the Credit Guarantee Trust for Small and Micro Enterprises (CGTSME). This trust guarantees loans sanctioned by banks to new as well as existing business enterprises up to an amount of 100 Lakhs. However, you have to pay the guarantee fee and premium. It could be in the range of 1.5% of the loan amount. You have to renew the guarantee on an annual basis by paying a minimum of 0.75% of the outstanding loan amount. This facility is available to business entities that cannot offer any collateral.

Should You Explore the Option of a LAP?

Consider the cost factor:

An unsecured Personal Loan is an expensive option. You do not have to provide collateral,but you have to pay a high rate of interest. On the other hand, the LAP is a Secured Personal Loan. As the banks have the collateral to fall back on, these loans do not attract high interest. However, you incur expenses like mortgage registration, legal scrutiny and valuation charges, and so on.

Consider the time involved:

If your requirement is small, it is always better to opt for a Personal Loan. These loans are readily available and do not require much documentation. The LAP can take time for processing. The banks need to check the genuineness of the title, evaluate the property, and so on before approving the loan. There are formalities like the creation of mortgage and registering it before the disbursement. Hence, it can take time. If your requirements are significant, it is advisable to go for the LAP option. You can also compare mortgage loan interest rates from top lenders.

Consider alternatives:

You have options in the form of the CGTSME guaranteed loans, invoice financing, hire purchase, and so on. These alternatives do not need you to provide any collateral to the banks. Such loans are available at lower interest rates than the personal loans. Exploring these options is advisable.

Consider the worst scenario:

No one takes a loan intending to default. However, defaults do happen. Sometimes, they are not under your control. You depend on your income generating capacity to repay these loans. It can happen that you might not generate sufficient revenue, especially in the initial stages. If you avail a LAP, you have to be careful to repay the instalments on time. Otherwise, there is a risk of losing the property. The banks can take possession of the property and sell it.

Is LAP a Good Option?

Yes, it is provided you take the right decision after considering all the factors discussed above. Using the LAP as a business loan is a smart choice if:

• Your requirements are more than what a small Personal Loan can meet.
• You have adequate collateral (after accounting for bank margin) to cater to your business needs.
• Other options like the CGTMSE loan, invoice factoring, hire purchase and so on are not readily
• Have confidence in generating sufficient income to repay your business loan and release your property.

Find an IDFC First Loan Against Property and avail it for your business purposes. It is any day cheaper than unsecured personal loans.

Also Read: Loan Against Property vs. Personal Loans

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