One of the most popular forms of borrowing available in the country today is a Loan Against Property (LAP). Many business owners use their commercial or residential property (s) as collateral or a guarantee in order to avail a loan. With such a secured loan, they can take of the various business needs and help drive growth opportunities for their business. What’s more? Such loans come with flexible repayment options that help you plan your finances better as well as ensure less burden on your balance sheet. However, is using a loan against property as a business loan a smart choice? You need to be aware of a few aspects before you make a decision.
Factors to be considered before you use the property for a business loan application
Keep the below-mentioned factors in mind before you use your property as collateral for a business loan.
1. Size of your business
An LAP will be available for numerous purposes. You can borrow funds for the purchase of new machinery or for maintaining working capital. The lender will estimate your repayment capacity based on the estimated annual turnover. Hence, you need to consider the size of your business before making an application.
2. Nature of your property
Financial institutions accept industrial, residential, and commercial properties as security against the loan but they do not provide loans against any agricultural properties.
3. Size of the loan
Depending on the amount of funds you need, you need to consider the alternatives. If you want a smaller loan, opt for a personal loan, as you will not need to provide any collateral.
4. Value of your property
When you apply for an LAP, you will receive an amount as high as 65% of the property value. You cannot receive 100% funding on the cost of the property. Hence, consider the current market value of the property you intend to use. Under-financing might not be a good idea.
Should you consider an LAP?
An LAP is a secured personal loan, which you should consider for the purpose of your business. An LAP will not be processed immediately as it is a time-consuming process. Hence, if you have an urgent requirement, you can opt for a personal loan. The most important thing to remember about an LAP is that you will have to make the repayment on time or you could lose your property to the lender.
Is LAP an ideal alternative?
If you consider the factors mentioned above and look at all the alternatives available for you, an LAP might seem like a good choice. If your borrowing requirement is higher than a personal loan, and you have a collateral for the loan, you can choose an LAP. You need to be confident about generating adequate income to repay the business loan.
Before making an application for an LAP for business purposes, always compare loan against property VS business loan. Understand the terms and conditions of the loan and make a well-informed borrowing decision. Compare the alternatives available and then decide on borrowing the right type and suitable amount of loan.
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Also read what are the myths of loan against property only at Finserv MARKETS.
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