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Using Loan Against Property to Start Your Business?

Updated on: 15 Dec 2023 // 4 min read // Loan Against Property
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You need capital to start a business. Not everyone has cash in the bank to start any business activity. People rely on various kinds of loans such as Personal Loans, loan against gold ornaments, Loan Against Property, borrowings from friends and relatives, and so on for funding their capital requirements. Let us see whether using the Loan Against Property is a suitable way to start a business or not.

Apply for IDFC Loan Against Property

What is a Loan Against Property (LAP)?

The LAP is a secured Personal Loan. It has all the characteristics of a Personal Loan with the principal difference being that you provide collateral to secure the loan. The LAP differs from a Personal Loan in the following aspects:

There is a higher eligibility criterion as banks usually provide 60% to 80% of the value of the property as a loan. You have to satisfy the income norms, though.

  • A LAP involves providing collateral to the bank for securing the loan. Hence, it is a secured Personal Loan.
  • The rate of interest in the LAP is considerably lower than that of the Personal Loans.
  • A LAP has a more extended repayment period in comparison to the Personal Loans.

These factors make a LAP a favourite choice for people to raise capital for their business.

The Business Loan Option

Banks have Business Loan products, but they are usually for established businesses. Banks are reluctant to finance new start-ups without security. Secondly, you should have a strong business proposal to convince the bank to lend you money to run the business. Even then, you have to bring in the margin as your share in the business. Banks usually seek 20% to 25% margin on their Business Loans. If you bring in the requisite capital, banks do finance new start-up businesses by taking adequate collateral.

Start-up businesses have this problem of furnishing collateral. Keeping this in mind, the Government of India has set up the Credit Guarantee Trust for Small and Micro Industries (CGTMSE). This trust guarantees bank loans to new entrepreneurs up to 75% of the loan amounts up to a maximum of 100 Lakhs. The CGTMSE takes care of the collateral aspect, but you have to bring in your share of the capital in the business from your sources.

Additional Info: Also Check Loan Against Property without Income Proof and ITR

The Loan Against Property is one option that can help you bring in this capital amount.

The Loan Amount

The maximum loan amount for a LAP depends on two factors.

The Value of the Property – Usually, banks give LAP in the range of 60% to 80% of the value of the property. Some banks even stretch it to 90%.

The Repayment Capacity – Banks place great emphasis on the repayment capacity. If you ate already earning some rental income on the property, it could serve as a bonus. However, you need to prepare a strong business proposal to convince the bank that you can generate the amount of income required to service the loan instalments.

The Loan Type

There are two variants of LAP:

Term Loan – Here the bank disburses the entire amount to your savings or current account. You have to service the instalments from the next month.

Overdraft – The banks sanction you a credit limit up to which you can withdraw. The advantage of the overdraft facility is that you will pay interest only on the amount you use. However, you have to service the interest every month. These overdraft accounts are subject to review and renewal annually. Hence, you have to submit your financial statements to the bank every year.

Which of the Two is Better?

If you wish to reduce your liability over a period, the term loan is a better option as you repay the loan in instalments. However, the running account Overdraft facility is better for a business to save on the interest component. You are free to deposit and withdraw subject to the credit limit. You pay interest only on the amount you use. Hence, you can save interest in an overdraft account. However, you do not reduce your liability as you do in a term loan.

Some banks offer the facility of progressive reduction of the overdraft limit in equal proportions over the entire tenure of the loan.

The Repayment Tenure

The term loan is repayable over a period of up to 25 years in the form of EMIs (Equated Monthly Instalments). The longer tenure makes it easier for the business to service the instalments as compared to the Personal Loans where the repayment tenure is of 60 months.

Verdict

Using a LAP to start your business is a good option because of the following factors.

  • You get a higher amount as compared to the Personal Loan
  • The Loan Against Property Interest Rates is less than that in a Personal Loan.
  • You get longer repayment tenure in comparison to the Personal Loan.

The question now is where to get a Loan Against Property. Almost all the banks in India offer loans against property at attractive rates of interest.

Also Read: Loan Against Property: All You Need to Know

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Best Loan against Property in India