A loan against property (LAP) refers to a secured loan, for which you can mortgage a commercial or residential property to gather funds for your business. Thus, it presents a practical option to make use of the value of your property without having to sell it.
LAPs come with flexible tenures and lower rates of interest, helping business owners expand operations, consolidate debt, and manage expenses.
What Qualifies as ‘Property’ in LAP?
Since an LAP involves mortgaging your property, here’s how financial institutions check if the property is eligible for a specific loan:
- Value: Loan providers check if the property has adequate market value based on the existing trends in real estate prices. Generally, companies grant an LAP of up to 60-70% of a property’s valuation.
- Ownership: A crucial part of the verification for granting a loan is legal due diligence. It’s an in-depth legal review of the property’s title, any disputes, and its compliance with all regulations. So, it’s important to make sure the property is fully owned by you, with a clear title with zero disputes over ownership.
- Type and Location: The property needs to be situated in an approved site within a city or town’s municipal limits. Loan financing companies also evaluate the property type to check its eligibility for a loan.
The most readily accepted property types include independent homes, bungalows, flats/apartments, and row houses. In case you’re mortgaging a commercial property, the most accepted types include retail shops, independent office spaces, restaurants, warehouses, and hotels.
How Loan Against Property Works for Business Owners
Applying for and securing an LAP follows a straightforward process comprising the following phases:
- Application and Eligibility Criteria
Submit documents such as income statements, ownership proof, identity proof, credit history, and business financials. Lenders will then check your eligibility based on the property value and your cumulative financial standing.
- Loan Disbursement
After approval, the loan is credited to your business account and can be used for different business purposes, including funding for day-to-day operations and investment in facilities, machinery, or equipment.
- Repayment Structures
Loan providing organizations also provide several repayment options, which include EMI-based plans where both interest and principal are paid in instalments. A borrower can choose the best-suited payment structure for the cash flow and financial health of their business.
Features and Benefits of LAP for Businesses
Utilizing real estate as collateral for an LAP is a smart way to access funds for your business. Here’s a quick look at the advantageous features and benefits of an LAP:
- Competitive Rates of Interest: An LAP is a secured loan, which makes interest rates relatively lower than credit cards or unsecured business loans.
- Flexible Tenure for Repayment: These loans generally provide extended periods for repayment, which is often up to 15-20 years and allow you to choose a tenure that best matches the cash flow for your business.
- Freedom Over End-Use: In case of an LAP, you have the flexibility to use the loan amount for any business purpose, including hiring staff, purchasing inventory, entering new markets, or consolidating debt.
- Continued Property Ownership: While your property is pledged, you can continue to use or benefit from it. After you repay the loan, the property is released, letting you retain the asset and utilize it as you please.
How to Apply for a LAP for Business
Given below is a round-up of the application process for securing a LAP from any financial institution:
Step 1: Check your eligibility through online calculators or consult lenders directly to make sure you meet the specific terms for the LAP, such as age, property criteria, and income.
Step 2: Go through the loan offerings of different NBFCs and banks to compare loan-to-value (LTV) ratios, interest rates, repayment tenures, and processing fees.
Step 3: Complete the loan application form, filling out all essential details, including personal and financial information and property specifics.
Step 4: Physically submit or upload all documents required for the process.
Step 5: There’s a verification process at this stage, during which lenders scan the documents submitted, the credit score, and the details of the property kept as collateral.
Step 6: Once the loan is approved, you’ll receive a letter of sanction that outlines the interest rate, tenure, loan amount, and other necessary terms.
Step 7: Finally, accept the loan offer and sign a loan agreement, after which the loan amount will be disbursed to the bank account of your business.
Risks and Considerations
While an LAP can be beneficial for achieving the financial goals for your business, there are certain points to keep in mind before applying for such a loan:
- Assess your repayment capacity: Evaluating your business’ current financial standing is crucial when it comes to applying for an LAP. Make sure to have a clear idea of the cash flow, current debt, expenses, and revenue forecasts to ascertain if you can meet the EMI requirements.
- Know the risks of pledging a property: In case you’re not able to repay the loan, the lending company may take ownership of the property. That’s why financial forecasting and planning are key steps to take before applying for an LAP.
Comparison: LAP vs. Business Loan
When you need funds for your business, a business loan is another option you might consider. Here’s how business loans are different from LAPs:
| Feature | Business Loan | LAP |
| Collateral Requirement | Not Required | Required |
| Loan Type | Unsecured | Secured |
| Interest Rate | Higher | Lower |
| Loan Amount | Moderate since it depends on credit profile and income | High as it is based on the property value |
| Processing Time | 2-3 days | 5-10 working days |
| Tenure | Up to 5 years | Up to 15-20 years |
| Risk | No asset at risk | Property is pledged |
| Flexibility of Usage | High | High |
Final Take
If you need substantial funds for your business at a lower interest rate and own an eligible property, an LAP is one of the best financing choices to go for. That said, you should assess your capacity to repay the loan, compare options, and plan your finances ahead to avoid any kind of risk.
Looking for a hassle-free way to secure funding for your business? Indifi Technologies makes it simpler by connecting small businesses with trusted lenders and helping you find the right loan option without the usual paperwork or delays.
Make your property work for your business and get the funds you need, faster and smarter.
FAQs
- How does the valuation of a property affect a borrower’s loan eligibility?
Pledging a property with a higher value directly leads to a higher LAP amount in line with the LTV ratio. This ratio is applied to the current market value of the property to get the potential loan amount.
- Why is the credit score essential to ensure eligibility for an LAP?
A credit score of more than 750 implies that the borrower is financially responsible and has a sound track record of repaying loans on time. This lets lenders extend higher loan-to-value ratios, and in turn, higher loan amounts.
- How can a borrower improve their eligibility for an LAP?
To be more eligible for securing LAPs, it’s essential to enhance the credit score, achieve stability in business, clear other loans to reduce instalments, and complete ownership and title paperwork for the property.