Loan against property: How it helps get a new business off the ground

Entrepreneurs can look at loan against property as the primary seed money for their business. We explain how these loans work.

The first question facing any potential entrepreneur is this: ‘How will I start the business?’ The question is not related to a lack of business ideas; it pertains to a funds crunch. Many businesspersons are hampered by a lack of money – hence, they are unable to get their business idea off the ground. They may either borrow seed capital from friends and family, or take a personal loan.

But there is a better way to get funds quickly and without paying as much interest as one does on a personal loan. We refer to the ‘loan against property’, a solution that can help get one’s business up and running.

How it works

The loan against property is a sum of money that the lending institution grants an applicant who pledges their owned property for a certain amount of time. It is different from a traditional home loan. The loan against property is a secured product, since one pledges the property as collateral. This is how it fundamentally differs from a personal loan, which is an unsecured loan product.

The features of loans against property

• Though slightly more expensive than a home loan (in terms of interest payable), the loan against property is more affordable than a personal loan.
• The factors that normally affect the loan amount are: Whether the property is residential or commercial, location, age, rented/vacant/self occupied, etc.
• The lending institution conducts its own valuation and bases the loan amount on the lowest evaluation. Normally, the loan amount does not exceed 70% of the property value in most cases.
• The tenure for these loans is often smaller than those of home loans, and larger than those of personal loans.
• The property documents remain with the financing institution till such time that the loan is repaid, but it does not exercise ownership over the property.

Repayment capacity is also an important factor in deciding if a loan against property is a good choice or not. A first time entrepreneur with limited prospects and erratic cash flows might find it difficult to repay the loan. For entrepreneurs with good business prospects, however, this is an affordable funding option. If repaid regularly and with partial pre-payment at regular intervals, the funds from the loan against property can literally help take one’s business to the next level.