LAP Vs Business Loan

Why is a loan against property better than a business loan?

Starting a business and establishing it in the market can be a difficult chore. It takes a significant amount of effort, experience, and, most importantly, money. If you don't have easy access to funds, your business will suffer, but so can your personal finances. So, what are your choices in this scenario? A business loan or a loan against property? To make a decision, you must first comprehend these two distinct financing choices.

What is a loan against property?

Loans secured by real estate are referred to as loans against property. For this loan, you can use the papers of your house, land, or commercial property as collateral. The lender does not impose any restrictions on how you use the funds under this financing arrangement.

Here are some of the most prevalent reasons you should opt for this loan.

  • Meeting business-related expenses
     
  • Debt consolidation
     
  • Home construction, renovation, or interior decoration
     
  • Paying medical bills
     
  • Taking care of your wedding expenses
     
  • Sponsoring your child's higher education

How does a loan against property work?

The loan against the property's principal amount depends upon your property's current market value. When applying for this loan, the lender sends an assessing officer to determine the property value. You also need to submit your KYC documents (know your customer). A loan against property is usually offered up to a loan-to-value (LTV) of 80% of the property's value. After successful verification and appraisal, the lender approves your application. However, they keep conditional ownership over your property to lower the credit risk. The ownership remains with them until you pay back the entire loan amount plus interest.

Now that you know what a loan against property is let's look at what a business loan is and how it works.

What is a business loan?

A business loan is a type of finance solely accessible to business owners. It is designed so that it can easily meet the different needs of a company. Business finance is offered in a customised form. If you need funds to cover operational expenses, you can apply for a working capital loan. Similarly, a machinery loan is ideal if you need capital to buy equipment.

Here are some of the most common reasons forusing a business loan.

  • New business acquisition
     
  • Establishment of a new office
     
  • Paying salaries to employees
     
  • Keeping up with operational costs

How does a business loan work?

Business loans are available to self-employed professionals, manufacturers, HUFs, private and public limited companies, and others. When you apply for this loan, the lender requires certain documents. The business loan amount depends upon your personal and business details like the type of business, credit score, profit and loss statements, etc. Most lenders provide unsecured business loans up to Rs. 30 lakhs with a maximum repayment period of 36 months.

Now that you know how a loan against property and a business loan function, it's time to decide which financing option is better for you.

Business loan vs loan against property: Which is better?

Here is a point-by-point comparison to determine which financing option is better.

1. Loan amount:

The business loan amount is entirely reliant upon your credit profile. If you have a strong credit history and profitable business, the lender may lend you up to Rs. 30 lakhs. However, this sum may not always be sufficient to meet your major business expenses. For example, Rs. 30 lakhsmay be ideal for small businesses, but the funds may fall short of your expectations if you own a bigcompany.

However, this is not the case with a loan against property. Since the loan value depends on the property's worth, you can borrow up to Rs. 5 crores. This sum is enough to meet all your financial obligations.

2. Flexibility to use funds:

Many people assume that both a business loan and a loan against property provide flexibility in use. You are free to put the money towards whatever you wish. However, the assertion is not true. When you take out a business loan, the lenders offer flexibility but only in the context of business. You cannot use the funds to meet your personal expenses.

However, this is not the case with a loan against property. Here, you can utilise the funds to meet business and personal expenses.

3. Interest rate:

The interest rate is crucial in evaluating which financing option is best between the two. The credit risk determines the interest rate. The applicable interest rate will be higher if there is a substantial risk of default.

Business loans are an unsecured source of financing. The lender will have difficulty recovering losses if the borrower defaults. As a result, they charge a higher interest rate to mitigate risk.

A loan against property, on the other hand, is a secured source of financing. A high worth real estate secures the funds. It means if the borrower defaults, the lender has the right to sell the property at auction to recoup its losses. Since the collateral eliminates the risk of default, a loan against property is one of the most cost-effective ways of financing. It has a lower interest rate than most other loans, not just business loans.

4. Repayment tenure

The loan repayment tenure has a direct relation with your budget. If the term is shorter, the EMI is higher, and the interest expense is smaller. In contrast, a longer-term means a lower EMI and higher interest payment. However, the loan value and lower EMIs take precedence over the total interest payable at the end of the term when running a smooth business.

Business loans are merely available for 36 months. In contrast, a loan against property has a flexible term of up to 15 years.To understand why aloan against property is better than business loans, you can refer to the table below.

   Parameters                  Business loan                  Loan against property        
   Loan amount      Rs. 30,00,000         Rs. 30,00,000
   Interest rate      12.5%         9.5%
   Tenure      3 Years         15 Years
   EMI      Rs. 1,00,361         Rs. 31,327


The table demonstrates the significant EMI difference between two loan options for the same amount but different tenure. If you are a small business owner, paying Rs. 1 lakh each month could put a strain on your finances. But if you go for a loan against property, you would just have to pay Rs. 31,327 each month. You could also choose for several partial prepayments if your company makes an unexpected profit over time.

5. Funding for start-ups

Finding a lender who offers business loans can be challenging if you start a business. Lenders usually consider applicants that have business experience of at least three years. One of the most common reasons for a start-up's failure is a lack of funding. However, the easy availability of a loan against property is a boon to start-ups. You will have no trouble obtaining financing if you own a property and have an excellent personal credit history.

To sum it up:

A loan against property can have an edge over business loans. It features a sufficient fund amount, a low-interest rate, and extended repayment tenure. It is the first choice for borrowers seeking to sponsor a large-ticket investment. Business loans are ideal if you need a relatively smaller amount for a short period.

Poonawalla Fincorp ensures that you have easy access to funds at a reasonable interest, irrespective of what you choose.

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