Loans Against Property (LAP) / Home Equity(HE):

Loan against Property (LAP ) is a very unique product which couples the feature of a personal loan and a secured loan . This loan product helps in unlocking the value of the most precious asset," Property". The end use of the loan is not monitored when compared to any other secured loan which generally comes with a specific purpose. In that sense , LAP is an any purpose loan , but at the same time secured by collateral of the property. This loan product is a very powerful one and is the best tool for those looking at debt consolidation. There are several businesses which has obtained high cost funds like unsecured business loans and leveraged themselves to a greater extend, thereby putting pressure on higher interest cost and lower profit margins. LAP perfectly fits for such businesses to reduce their borrowing cost and consolidate debt at a lower cost. The other advantage is the tenor for LAP loan is generally in the range of 7 to 15 years, thereby giving the borrower to plan business expansion among other things. Moreover with the appreciation of property, future requirements also can be taken care of. This allows the best use of the property that is owned and at the same time will enable the raising of funds required for various purposes. Also, a loan against property comes with a low interest rate compared to that of a personal loan or home loan.

Characteristics of LAP:

  • The loan is secured in nature.
  • Only those who own a clear and marketable property can avail this loan.
  • Loan is long term in nature ,usually ranges between 7 to 15 years depending on the use of property.( Commercial or residential).
  • Interest rates are low when compared to an unsecured loan.
  • Funds can be used for any personal or business purpose.
  • Best suited for people looking for debt consolidation and business expansion.
  • Quantum of loan is high depending on the value of property.
  • It increases the future borrowing capacity along with property appreciation.
  • They are long-term in nature; tenors usually vary between 5 - 30 years
  • The loan can also be used as a normal overdraft or a dropline overdraft (depending on the lender)

Cash Credit

Cash credit is a facility which operates in a manner different than that of various other loans. Cash Credit comes with a limit and it helps in the smooth conduct of business. It also helps in reducing the asset liability mismatch. Cash credit limit is sanctioned for a specific period of time, usually a year. The entity to which the limit has been sanctioned can use the cash credit at any point during the time period and the specified rate of interest will be charged on the amount that is taken or used. It can be operated like any other account. It means withdrawing money when there is a need and then depositing back the payments received from the parties.

Once the time period for the cash credit limit is over, the limit has to be renewed. Also limit can be enhanced if the business is in expansion mode. The rate of interest on cash credit depends on the market conditions as well as the behavior of the borrower over the last time period when he/she operated this facility.

Cash Credit also helps in bridging the gap of current assets and current liabilities. Typically such requirement to bridge the gap is also known as a working capital requirements.

Any business activity is not conducted solely in cash but it also requires credit facilities . This means that every purchase or sale does not result in immediate payment, rather in most cases the cash will come after some point of time. Sales on credit will result in debtors while other receivables will give rise to an asset that will be received in the future. Similarly, when a purchase is made there will be creditors, and there might be some payments that a business has to make which will result in an outstanding. This along with the amount locked in stock and raw materials will make up the working capital requirement for a business.

There is a specific amount that will be locked up in stock and raw materials till the time the entire cycle is set wherein the various payments start coming in, and on the other side, the payments required to be made are also done. This amount varies across businesses, resulting in different working capital requirements.

Overdraft

Many a time it is not possible to raise loans during an emergency for funds in the business. Under such circumstances the investments in the form of Fixed Deposits, Govt of India Bonds, Debt funds can help in raising funds without much difficulty. Here, an investor can earn returns on his/her investment just like a normal investment and at the same time use this investment as a means to raise funds that can be used for the business.

An overdraft facility calls for using some investment of the borrower as a security and then providing a facility to borrow against this amount. There is a specific amount that is allowed as the borrowing. The security earns the normal rate of return for the investor and at the same time provides additional finance facility. The good part of the entire exercise is that the borrowers will pay interest only for the time period for which they have borrowed the amount and that too for the specific amount for which they have overdrawn the account.

Term Loans

Term loans are one of the traditional and most common routes used by entities to raise funds. These funds are then used for the business in various ways. One big area of lending in case of term loans is the loans given to small-scale enterprises and businesses that are typically run by individuals or even firms and companies. Term loans form a significant part of the lending process of an entity and this is the reason why it requires attention.

What distinguishes term loans from other borrowings is its tenure. Various other loan options available are short term where the time period is usually around a year and has to be renewed thereafter. But term loans have a slightly longer time period .

Most banks in the country provide term loans, so it is not difficult to obtain this type of loan. The conditions and other factors related to the loan will change and there might be some specific sub-category under which the loan will be given by a specific bank, so these factors have to be distinguished while selecting a lending bank or institution. Having a good relationship with the bank will help a borrower while taking this loan, so one should approach a bank with which he/she shares a high comfort level.

There are various purposes for which a bank will provide a term loan. There is a list of reasons why this is done and the borrower has to ensure that the reason that they seek a loan for is one of it. Some of the common reasons listed by the banks include:

  • To set up plant & machinery
  • To reduce high cost of borrowings
  • To build assets for a business
  • To help grow a business through strategic investments
  • To strengthen the asset base
  • A borrower has to provide the necessary details and documents in support of the claim and then he/she will become eligible for the term loan.