Loan Against Property Or Business Loans – Starting a business and sustaining it in this competitive world is not an easy task. It not only requires effort and experience but also money (capital). You will need funds for running it smoothly and also for business growth and expansion. Businesses can suffer due to a lack of timely funds. So, a business owner must be able to choose the right credit tool for the smooth running and expansion of their business. When it comes to borrowing money for business purposes, the two most cost-effective credit tools are loans against property and business loans. In this article, we settle the debate on why is LAP better than business loans. Read on. to know more.
Loan Against Property Or Business Loans – Loan Against Property
A loan against property also referred to as a mortgage loan, is a secured loan, where the borrower pledges their commercial or residential property for funds. In this case, the ownership of the property remains with the borrower. Once the loan is repaid in full, the borrower gets the documents related to the property back. Funds availed of from a loan against property (LAP) can be used to meet the following purposes:
- Meeting expenses related to business and growth
- Debt consolidation
- Buy, construct or renovate a home
- Paying medical bills
- Managing wedding expenses
- Sponsoring higher education for your child
Loan Against Property Or Business Loans – Business Loan
A business loan is a loan offered essentially to self-employed professionals, manufacturers, private and public limited companies and others. Such loans are personal loans and are unsecured. These loans can be conveniently used to meet varied purposes related to the business. Some of the things you can do with a business loan are:
- Starting a new business
- Purchasing equipment and inventory
- Expanding operations
- Paying salaries to employees
- Arranging working capital or managing operational needs
Now that you know the functions of a loan against property and a business loan, it is time to decide which option would suit you better.
Loan Against Property Or Business Loans – Why is LAP Better than Business Loans? Here’s Why
With the current interest rate on property loans being more attractive than business loans, more people are opting for these loans for their business growth and expansion. Let us now understand why in the fight between Loan against property vs. business loan, why does LAP win.
Loan Against Property Or Business Loans – Interest Rate
Since business loans are unsecured and involve a risk factor, the lender here has difficulty recovering losses in case of a default. Thus, a higher interest rate is charged by the lender to mitigate this risk. A loan against property, on the other hand, is a secured financial tool. In case of a default, the lender here has the right to sell the property pledged as collateral at auction to recover the losses. Since the risk involved here is minimum, it is the most cost-effective financing tool. It also has a lower interest rate than most other loans, not just business loans. A property loan EMI calculator can be used to know in advance the EMI amount for comparison purposes.
Loan Against Property Or Business Loans – Loan Value
The business loan value depends on the credit profile of the borrower. Even a strong credit profile can fetch you a maximum of Rs.50 Lakh which may not always be sufficient to meet your business expenses. This amount may be suitable for a small company but for a big company, the funds may fall short of expectations. However, for a loan against property, the loan value depends on the property’s worth. You can borrow up to Rs.5 Crores or up to 60-80% of the property’s value, provided you meet the property loan eligibility criteria. You can also opt for a top-up loan if required.
Loan Against Property Or Business Loans – Repayment Tenor
The loan repayment tenor also affects the budget. For a shorter loan tenor, the EMI is higher and the interest is less. However, a longer term means a lower EMI and higher interest payment. Business loans generally have a shorter loan tenor and higher interest rates. In contrast, the loan repayment tenor for a loan against property can be stretched up to 18 years as per the borrower’s requirement. This makes financial planning and loan repayment easier.
Loan Against Property Or Business Loans- Flexibility in Fund Use
Most of us think that both a business loan and a loan against property provide flexibility in fund use. In other words, we assume that you can use the funds available in both cases for whatever purpose you wish. But this is not true. When you take out a business loan, the funds availed can be used for business purposes only. This fund cannot be used to meet your personal expenses. However, in the case of a loan against property, the funds can be used to meet both business and personal expenses.
Loan Against Property Or Business Loans – Business Loans are Usually Sanctioned to Businesses with Experience
If you are just starting your business and need funds for it, then finding a lender who offers business loans can be a challenging task. Here the lenders generally consider applicants who have business experience of at least three years and this may go against a start-up. However, the easy availability of funds from loans against property is a plus for start-ups. If you have a property and a good credit history, then you will have no trouble obtaining a property loan.
Loan Against Property Or Business Loans – LAP vs Business Loan: Which is Better?
In conclusion, we can say that a loan against property has a slight edge over business loans. Large loan amounts, low rate of interest and extended repayment tenor make it the first choice for borrowers seeking to sponsor a large amount. Business loans are, however, ideal if you need a relatively smaller loan amount for a short period. Thus, the situation and the need for funds differ from borrower to borrower and require careful evaluation before the most appropriate credit tool can be selected.