What Does 'Loan Against Property' Mean and How Can It Be Utilized for Business Growth?

Many times in India, businesses require considerable finances for various reasons, including scaling operations, purchasing equipment, and meeting working capital needs. Although there are many options when it comes to financing, borrowing money against your real estate property is one way through which you can access loans at relatively affordable rates. This particular type of loan highlights the ability of business people with their own buildings or land parcels to use them as collateral to acquire funds at relatively lower interest rates.

But what is a loan against property, and how does it help grow a business? Let’s critically look at this through this article.

Loan Against Property Meaning

If you’re Googling, what does “loan against property” mean? We’ve got you covered! Under a loan against property, the borrower promises their residential/commercial/industrial estate to serve as security for securing finance under a loan against property (LAP). The profit from selling the asset presented as collateral is used by creditors to cover risks of non-repayment. Typically, this amounts to about 60% to 70% of the property’s market value.

Due to the fact that it is backed by an asset, LAP usually has lower rates compared with uncollateralized commercial loans. The process takes a lot of time, which makes entrepreneurs prefer this type of loan for substantial amounts.

Key Benefits of a Loan Against Property

A loan against property won't change everything for business entities that desperately need some kind of financial assistance. Some major advantages are listed below:

1. Low Interest Rates

• Generally secured loans, such as LAPs, have lower interest rates than unsecured ones due to a lower risk of lending for the lender.

• Lenders charge an annual interest rate ranging from 8% to 12%, depending on the specific type of asset and the borrower's profiler.

2. High Loan Amount

• The amount of lending may go up to several crores or more depending on its market value and the policies of a specific lender.

• It is thus suitable for massive expansions, procurements or long-term investments.

3. Flexible Repayment Tenure

• Usually, EMIs become more affordable with the loan tenure of these loans going up to 15 to 20 years.

• Consequently, long-term loans mean less load for those running an enterprise.

4. Continued Property Ownership

• Even upon pledging, one can still own and use collateralized estate.

• Thereby, after settling the debt, the property can be completely transferred into personal possession.

5. No Restrictions on Fund Usage

• Some business loans come with specific purposes for which the funds can be used. However, there are no such conditions for LAP.

• Thus, entrepreneurs who prefer debt financing as a source of their company’s innovation funds may easily utilize these funds for investments, working capital, marketing or even employee hiring.

What are some ways in which a loan against property can help with business growth?

A loan against property can be a lifeline for businesses that want to achieve scalability. Here are some of the ways in which it could help:

1. Expansion of Business Operations

Should there be growth in business, there may be a plethora of needs. These may pertain to opening new branches or purchasing more office space and infrastructure investments. A loan provides the finances needed for expansion.

2. Investment in Machinery and Equipment

There is usually a need for heavy equipment and advanced technology in manufacturing and production industries. LAP can help upgrade machinery, enhance production efficiency, and increase productivity.

3. Meeting Working Capital Needs

At a given time, every type of business requires some cash, which it uses daily to take care of its activities, pay workers, stock up on goods, etc. A loan against property can be used as bridge financing for any current cash shortage, ensuring business continuity.

Eligibility Criteria for a Loan Against Property

Before giving out a loan against property, there are various things that lenders have to look into. Here are some of the eligibility criteria:

1. Ownership of Property – Residential, commercial, or industrial properties should be owned by a lender that can be collateralized.

2. Business Stability – To gauge repayment ability, loan providers will consider business turnover as well as profit trends for your business.

3. Credit Score – A CIBIL score of at least 700 enhances the borrower’s chances of getting approved for this type of mortgage loan.

4. Income Proof – The individuals must show IT returns, bank statements, and financial statements.

5. Age Limit – Typically between 21 and 65 years at the time of loan maturity.

How to Determine Your Loan Eligibility?

Before applying for a loan against property, it is essential to check the eligible loan amount. Thus, an eligibility calculator is needed.

What is an Eligibility Calculator?

An eligibility calculator is an online tool that is able to determine the amount of loan one can apply for depending on the property value, the borrower’s monthly income, their existing financial obligations, loan tenure, and interest rate.

One must use this calculator if one wishes to ensure proper economic planning besides selecting the right amount of cash borrowed.

Important Factors to Consider Before Applying

Below are some crucial considerations business owners should make when applying for loans using real estate properties:

• Loan Term and Equated Monthly Instalments (EMIs) – Longer duration results in less regular EMI payments but more interest paid over the years.

• Valuation of Property – Always ensure that your property is priced correctly so as not to miss out on better offers from lenders.

• Type of Interest Rate – EMI amounts depend on whether fixed or floating rates are used.

• Penalties for Prepayment – Early repayment of loans attracts some penalties from some lenders. Always check for prepayment charges before accepting the terms they offer.

The Bottom Line

A loan against property is a powerful finance tool for businesses that want to expand their operations. It is the best financing option available due to its low interest rates, flexible repayment options, and high amounts of loans one can take. Therefore, before you dive into that application process, look at your eligibility using the eligibility calculator to compare offers from different lenders. 

With proper financial planning, a can be resourceful in driving business success over time. Good luck applying!