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

by Finway FSC Empowering People Financially

People take business loan for various purposes. They can go for a term loan for setting up a factory or acquiring machinery, or you can take a loan for a working capital purpose. Banks generally look at the turnover of the business and process loan based on it. For e.g., banks process working capital loans about 20% of your projected yearly turnover. Bank can give 75% or 80% of the value of machinery.

What type of property is accepted as collateral?

Any commercial, industrial, or residential property is considered as collateral. However, banks don’t accept agricultural land as collateral in many areas.

Value of collateral:

If you secure a business loan by providing a property, then the bank usually gives 100% value of the property. However, if you opt for Loan against Property, then the bank only gives 60% to 65% of the property value as the loan. Hence, you need to work out if the amount will suffice your need.

Size of the loan:

If you need a small loan, then you can easily get “unsecured business loan”. You do not need any collateral. However, you need a good credit score for this.

Should You Explore the Option of a Loan against property (LAP)?

An unsecured business loan is an expensive option. Although you don’t have to provide collateral, you have to pay a high rate of interest. LAP is more secure and doesn’t attract high interest. But you have to pay for mortgage registration, legal scrutiny and valuation charges, and so on.

Time is an important factor!

If you need a loan for a small period of time, then a personal loan is the best. They are processed easily and doesn’t require much documentation. On the other hand, LAP has a lot of formalities and take a lot of time.

Consider the worst scenario:

Whenever you take a loan, you need to consider the worst situation. If you are starting a new business, it is advisable to think that you might not generate any funds in the initial stages. Hence, you need to plan according to especially if opt for LAP.

Is LAP a good option for Business loans?

You need to consider all the factors before deciding on anything. If you need a significant amount and over a long duration, then LAP is the right option. However, you need to be the loan isn't under financed and you have a plan for the worst scenario.