Do you own a small business in India, say a generate store. The business is doing good, and you would want to open another shop. However, you may need funds to open another store. In such a situation, you can make arrangement for the funds you need in one of two ways. You can either apply for a secured business loan or a loan against property. Both the loan options are good, however, choosing the right option can be quite challenging.
In this guide, we discuss what a business loan is and what a loan is against property. This will help you make the right borrowing decision and choose the right loan type that perfectly aligns with your needs. Read on!
What is a loan against property?
If you are a first-time loan applicant and not sure what is a loan against property, then you must know that it is a secured of credit where you offer a real estate property that you own as collateral to the lender against the amount you want to borrow. The property you pledge can be a residential or commercial property or even a piece of loan that you own.
When you apply for a loan against property or LAP, the lender does not have any restrictions on how you use the funds. You can use it for any legal purposes as you like, including –
- Home construction or home renovation
- Taking care of wedding expenses
- Paying for your child’s overseas education fees
- Buying new business machinery or expanding the business operations
If you are wondering how much loan you can get for business by availing a LAP, the maximum amount will greatly depend on the current market value of the property you pledge. Generally, the LTV (loan to value) ratio for LAP is 65% of the value of the property.
What is a business loan?
A business loan, as the term suggests itself, is a form of credit that is specially meant for business owners and enterprises. It is designed to help business owners meet their financial needs and take care of their business expenses. There are different types of business loans that you can avail of. For example, if you need a funds to take care of the operational expenses, you can apply for a capital loan. If you need to buy new business equipment, you can apply for a machinery loan.
You can use a business loan for several purposes, including –
- Acquiring new business
- Buying or renting office space
- Paying employees’ salaries
- Taking care of operational costs
A business loan can be availed by self-employed professionals, private and public sector companies, small shop owners, manufacturers, traders, etc. The maximum amount you can borrow as a business loan greatly depends on your credit score, business income, and other factors. With reputed lenders, you can get a loan of up to Rs. 10 crore and a repayment tenure of up to 12 years.
Understand the difference between a loan against property and a business loan
LAP and business loans are different in more than one way. The following table will give you a fair idea of the differences between these types of loans.
| Difference | Loan Against Property | Business Loan |
| Collateral Needed | Yes, to avail of a loan against property, you must have an asset that you must pledge as collateral with the lender to get the funds. | For business loan, a collateral is not a mandatory requirement always. Many lenders nowadays offer a business loan without the need for any security. However, if you apply for a secured business loan, then you need collateral. |
| Rate of interest | The interest rate for LAP is generally lower than other forms of unsecured loans as the lender has the security of the property. | The interest rate for an unsecured business loan can be higher than LAP. However, if you apply for a secured business loan with reputed lenders, you can get the loan at affordable interest rates. |
| Repayment Period | The repayment period of an LAP tends to be lower than that of a business. The maximum loan tenure may be different from one lender to another. But it generally ranges from 7-10 years. | Nowadays, you can avail of a secured business loan for an extended period of up to 10 years. This gives you enough time to repay the loan comfortably without compromising on other personal finance or business goals. |
| Loan Amount | The maximum loan amount you can avail mainly depends on the value of the property you pledge. | The maximum loan amount you can avail of mainly depends on your business income, credit score, and repayment capacity. Many lenders offer a secured business loan of up to Rs. 10 crores to help you meet all your business expenses. |
| Purpose | You can avail of a loan against property for any purpose you want; it could be for personal or business use. | You can avail yourself of a business loan only to meet business-related expenses. |
LAP or Business Loan – What to Choose?
Both LAP and business loan have their pros and cons. While the interest rate for LAP is lower, there is always a risk of losing your valuable asset if you fail to repay the amount. On the other hand, in a business loan, you need not fear losing your asset, but because of the high interest rate, the EMI may be higher, which can cause financial constraints.
So, you must decide whether to apply for a loan against property or a business loan based on your specific financial requirements and circumstances. You can opt for LAP if you want to borrow money at a lower interest rate and have a property that you can leverage to get the funds.
On the other hand, if you don’t have any significant business assets that you can use as collateral to avail of a loan, you can apply for a business loan. These loans have simple eligibility and let you get the funds immediately.
You can also apply for a secured business loan which combines the benefits of both LAP and business loans. You can get the funds at competitive interest rates and use the funds for any business-related expenses you like. To learn more about this kind of loan, visit their website now!