With numerous borrowing options such as personal loan, business loan, gold loan and loan against property available, it’s vital for entrepreneurs to choose the most suitable loan option to start a business.
Starting a business is no easy feat, especially when it comes to choosing right source of funds for raising capital. With numerous borrowing options such as personal loan, business loan, gold loan and loan against property available, it’s vital for entrepreneurs to choose the most suitable loan option to start a business. Let’s discuss whether loan against property (LAP) would be an apt choice for entrepreneurs:
Interest cost: Since loan against property is a secured loan backed by collateral in the form of property, it usually comes with lower interest rates vis-à-vis other options such as personal loans. Interest rates on loan against property can be as low as 8.75% p.a. (v/s Personal loan interest rate, starting 10.65% p.a.), depending on the loan amount and your repayment capacity.
Maximum loan amount: Maximum loan amount in case of a loan against property depends on loan to value ratio (LTV) offered by the lender. Usually, lenders provide up to 70% of the property’s value as loan, and it can go as high as Rs 10 crore, depending on the property. While higher loan amount offered with lower interest rate may seem to be lucrative to many, keep in mind that you would have to repay the loan along with the interest and failure to do so may lead to losing the ownership of your property.
Repayment tenure: LAPs generally offer up to 15 years’ repayment tenure, which is comparatively higher than other options such as personal loans that extend up to a maximum tenure of 5 years. While starting a business with funding through LAP, higher repayment tenure would come handy while repaying the loan conveniently over a longer tenure.
Property’s valuation and Loan disbursal: A high valued property does not necessarily ensure a higher loan amount. Before finalizing the property loan’s amount, lenders take into account various factors which can impact the property’s valuation. Valuation of your property depends upon the location of the property, age of property, infrastructure, geographical stability etc. Post valuation, lenders finalize the loan amount to be disbursed. Lenders also take your income, repayment capacity, business model, cash flow projections etc. into consideration before extending the loan offer. Businesses involving higher risks may get exposed to financial distress in case they aren’t able to repay the loan timely.
As an entrepreneur, you must be confident regarding repayment of the loan and demonstrate a strong business model which convinces the lender to grant the LAP.
Should you opt for LAP?
Being a secured loan backed by collateral usually in the form of residential or commercial property, LAPs have been offering high loan amounts at lower interest rates, compared to other funding options. With proper documentation such as KYC documents, property’s ownership documents, fulfillment of legalities, technical clearance of property and its ownership’s authenticity, the loan procedure smoothens, resulting in quick disbursal of the loan amount. Since business loans are generally offered to the existing businesses and not for those requiring funds to start one, LAP can be a good option for entrepreneurs to source funds.
You must have a clear roadmap for cash flow projections, business’ feasibility, and revenue generation plan etc. to improve chances of loan approval and timely repayment during the loan tenure. Additionally, since a business is considered a separate legal entity from the entrepreneur, the entrepreneur’s repayment capacity and credit worthiness is assessed through his/her credit history. Entrepreneur’s prior experience in the field would also affect the loan eligibility.
However, while opting for LAPs, you must keep in mind that some lenders may levy penalty charges in case of prepayment of loan by self-employed (non-individuals), which is usually up to 2% of the outstanding loan amount.
(By Naveen Kukreja, CEO & Co-founder, Paisabazaar.com)