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Benefits of availing a Loan Against Property

A Loan Against Property (LAP) is one of the most popular forms of secured loan for SMEs in India. It is mainly used for fulfilling business objective. Most SMEs opt for this loan to accomplish organizational needs, acquire an asset and fund new requirements.

Traditionally, LAP was considered as a means to bridge short-term cash needs. However, smarter business managers are now leveraging Loans Against Property to unlock the true potential of their assets. Generally, this business loan is given against residential, commercial and industrial properties.

Here are some of the strategic uses for a Loan Against Property:

  • Expansion - To stay competitive in modern times, businesses must expand beyond local territories. However, it's easier said than done. Expansion requires capital for buying space, machinery, and other allied services. A Loan Against Property can facilitate that.
  • Training - Gone are the days when training was restricted to product knowledge, classrooms PPTs, and on-the-job interventions. Today, it warrants learning new tools and technologies that help companies stay relevant. An SME can consider sending its key personnel to overseas training institutes for acquiring future-ready skills and technical know-how.
  • R&D and product development -R&D is the backbone for most new-age businesses. It helps a company experiment with newer raw materials, processes, and strategies. Ongoing spends for product testing and development are one of the key spends for companies trying to ‘invent and disrupt’ the status quo. SMEs engaged in such activities can opt for this loan to facilitate their R&D spends.
  • Marketing and promotions -Today marketing and promotions are not restricted to direct marketing, trade journals, exhibitions, brochures, and pamphlets. Digital media has changed the rules of the game and adequate financial sources are required to leverage the opportunities presented by new age advertising platforms.

Benefits of LAP

  • Continuous ownership -Perhaps the most important benefit of a Loan Against Property is the ability to unlock the dormant value of an asset. With the help of this loan, businesses continue to own and use the asset, while mortgaging the same for availing a loan. This is a mutually beneficial situation for both parties.
  • Lower interest rate -Since a Loan Against Property is a secured loan, it attracts a lower interest rate - between 9% to 14% (indicative) compared to personal loans that can cost as high as 20% p.a.
  • Low EMIs -Some lenders offer their clients the flexibility to choose an EMI amount they are comfortable with.
  • Longer repayment tenure -Business loans are generally used for long-term goals like product R&D, expansion, etc. Hence, lenders offer a relaxed repayment tenure (say 5 to 15 years). This eases the burden on the borrower and facilitates repayment.
  • Various types of assets -Traditionally, Loan Against Property refers to assets like land and real estate. However, lenders also offer loans against assets like machinery, raw materials, equipment, and intellectual property. This offers a lot of options and flexibility to the borrower.

The general requisites on Loans Against Property for business are:

  • Ownership documents of the property to be mortgaged (The property should be registered in the name of the firm)
  • Copies of IT returns of the previous three years
  • Audited balance sheet with Profit and Loss Account including tax audit report
  • Six months bank statements of the main operating bank account
  • Additional documents in case of partnership firms
  • Additional documents in case of Private/Public Limited company
  • Existing loan details (if any)

The requisites may vary from lender to lender. Scale and scope of operations, business model, market potential, existing contracts, credit score, and overall profitability are some of the key criteria that every lender evaluates.