How to Use Loan Against Property to Fund Your Business
Investing in or starting off a new business venture from scratch can prove to be a difficult task financially. In general, first-time entrepreneurs don’t ever find themselves eligible for business loans. However, one great source of funding can be a loan against property (LAP).
As a Loan against Property is a secured loan, it requires you to keep your residential or commercial property as collateral to get monetary assistance from financial lenders. The availed loan amount can be utilized for your business start-up or business expansion. The loan also has attractive repayment options.
The following are some reasons as to why you should opt for a loan against property to fund your business:
- The ability to avail larger loan amounts
- Quicker loan approvals than personal loans
- Getting the loans processed at nominal interest rates
- Ability to align the loan amount to the needs of the business
The Loan Amount
The maximum loan amount that can be availed through LAP depends on the following two factors:
- Property Value: Financial lenders offer Loan against property in the range of 60% to 90% of the property value.
- The Loan Repayment Capacity: Lenders usually evaluate the loan repayment capacity of the individual strictly. While applying for a LAP, if you have already earned a certain rental income from the property, then it can serve as a bonus. However, you must come up with a very good proposal to convince the lenders that you can repay the loan amount within the given tenure period.
The Loan Type
LAP is available in the following two types:
- Term Loan: In this case, the financial lender disburses the complete loan amount to your bank account. You will have to start servicing the instalments right from the coming month.
- Overdraft: In this case, the financial lenders will sanction a credit limit. You can only withdraw amounts up to the sanctioned limit. The benefit of this facility is that you end up paying interest only for the credited amount. Such overdraft accounts are subjected to review on an annual basis.
Which one is better?
If you prefer to reduce the liability over a period of time, then you must opt for the term loan as you will repay the loan amount in instalments.
However, if you wish to save on the interest paid, then you must go with the running account overdraft facility. You can easily deposit as well as withdraw as per the credit limit. Interest is applicable only for the utilised amount. Therefore, you end up saving on interests in an overdraft account.
Few financial lenders even offer a reduction of the overdraft limit in terms of equal proportions over the loan repayment tenure period.
The Loan Repayment Tenure
You can repay your LAP amount over a period of 20 years through EMIs. Such a long repayment tenure period makes it easier for the applicant to pay the instalments when compared to Personal Loans. The repayment tenure period in the case of personal loans is a maximum of 60 months.
You can utilise the availed loan amount for making sound business decisions. The lengthy repayment tenure period also works in your favour. By leveraging your property, you can plan the future of your business without any stress as you have a good amount of time to repay the loan. For instance, a Loan against Property from a majority of financial lenders comes with a repayment term period of up to 20 years. As you have ample time to repay the loan amount, you can easily borrow the loan amount depending on your business plans.
For example, let us consider that you decided to open up a new branch office in a new city to expand your business. This will involve construction, legal proceedings, as well as recruitment. This move will surely reap benefits, but only over a period of time. As you have a longer repayment tenure, your EMI will be small and hence you can finance both your business as well as those EMIs quite easily. After you break even, you can choose to prepay major portions of your loan amount so that you can come out of debt quite early.