Should you give thumbs up to loan against your property for starting a business?
With growing aspirational class of consumers, India has become one of the fastest growing economies of India. It's a land of huge opportunity attracting many foreign eyeballs. India has always been a country of rich talent & the current industry landscape is perfect for aspiring entrepreneurs to take plunge in the market to make their dream big.
But, before starting any business, the first thing that strikes the entrepreneur's mind is "from where the initial money to start the business come will come from?" Arranging for capital to start a new business can be as challenging as setting up the business itself. Entrepreneurs can take a personal loan, but it could be not sufficient or there are high interest charges attached to it.
In such cases, Loan Against Property (LAP) is exactly what they need. This is a secured loan in which an entrepreneur can mortgage his property and borrow money against it. Being one of the cheaper retail loans after home loans; LAP's disbursed amount depends on the value of the property. Being a collateral based loan, LAP's rate of interest is normally lower than the personal loan, whereas its loan eligibility is determined primarily by the value of the property and income. But, LAP does come with certain limitations in terms of the value and the tenure of the loan
While many borrowers take LAP instead of personal loans to meet their big expenses like education or weddings, but majorly it's been utilized by businessmen or entrepreneurs to meet their funding requirement related to their business. The lower rate of interest makes LAP a handy instrument for self-employed individuals. Borrowers can avail the loan amount from financial institutions either as a lump sum after their property has been mortgaged or as an overdraft facility. Moreover, the longer repaying tenure of LAP of up to 10-15 years gives the borrowers a choice to repay in lower installments. But at the same time there are certain minute impediments they must watch out for as follows:
1. Financial institutions take two valuation reports while sanctioning LAP. The loan amount disbursement (normally specific % of valuation) by the financial institutions is based on the lowest valuation report. Sometimes, the financial institutions even consider the distressed valuation of an individual's property and disburse the loan amount basis the figures.
2. Sometimes customers may be under the impression that they own a high valued property and would be eligible for a high valued loan amount. But, there are multiple factors which could impact the property valuation & hence the final disbursement. Normally financial institutions consider LAP only for residential or commercial properties and not against the industrial properties. Even the amount disbursed also depends on whether the property is self-occupied, rented or vacant etc. Other factors which could impact the property evaluation are location, age of the property, etc.
3. Property value is not the only factor in deciding the loan amount, but an entrepreneur's repayment capability too is taken into consideration while arriving at final sanction amount.
4. The low-interest rates of LAP may sound lucrative, but entrepreneurs must understand that taking LAP would mean handing over the property document to FIs for the particular loan tenure. Hence, they must keep a track of how long they would want to keep the documents with the FIs. Being an entrepreneur or starting a business is not an easy task. For young entrepreneurs taking a first time plunge, it makes little sense in taking a loan against property to fund their businesses.
Although the product clicks with borrowers due to its speedy approval, easy documentation and flexible repayment options, LAP is not advisable for entrepreneurs with high-risk business which business which can possibly expose them to financial distress. It is always risky to put your property at stake, especially if it's your house. Instead, option of LAP should be used when the borrower knows he would be able to repay it before the imposed period or only if it is a second property being mortgaged.
Life is all about making the best of the opportunities you get and the dream should not wait for the execution due to lack of funds when you have option of LAP available. LAP can be deemed as a suitable loan for starting a business driven by its cost effectiveness, easy procurement, straightforward documentation and the asset ownership that continues to stay with the owner and can be put to productive utilization for the long run. Thus, considering its tremendous potential in this segment, LAP can perhaps be one of the best options to get a new business off the ground.