Starting and growing a small business involves significant effort, and securing funds for equipment, inventory, or staffing can be challenging. In such cases, a micro loan secured against property offers an alternative financing route for business owners seeking to leverage their assets.
Financial institutions are offering innovative loans against your residential or commercial property to entrepreneurs who wish to grow their fledgling ventures. Here's how you can utilise a micro loan against property.
What is a Micro Loan Against Property?
A micro loan against property, also called a LAP or property loan for startups, allows you to borrow small business financing based on the equity in your residential or commercial real estate holdings. As it is secured by an asset, loan providers can offer lower interest rates and more flexible terms compared to unsecured business loans.
You can avail amounts typically in the range of ₹1 lakh to ₹30 lakhs or more with repayment periods from 1 to 10 years and higher. The equity in your pledged property provides the collateral or security lenders need to mitigate risks.
Benefits of Availing a LAP for Your Enterprise
A micro loan against property can offer several advantages that specifically cater to expanding small businesses compared to traditional funding routes. Some key benefits include:
1. More Affordable Funding
When you pledge your property as security for a micro loan, lenders generally offer interest rates that begin around 10–12% per annum, though the exact rate will depend on both the lender’s policies and your individual financial profile. It's important to remember that additional costs like processing fees and potential charges for early repayment, can differ from one institution to another. For this reason, always review the loan terms carefully and review offers before making a decision.
2. Quick Approvals
Loan against property assessments primarily consider the value and equity in your provided collateral as opposed to only your credit or business profiles. This allows quicker appraisals so you can access funds in a matter of days.
3. Flexible End Use
LAPs offer flexibility in the deployment of funds across any legitimate business purpose - whether working capital, equipment purchases or scaling production.
4. Lower EMIs
With longer repayment time frames, micro loans allow you to structure your equated monthly instalments (EMIs) as per your enterprise's cash flows and growth plans.
5. Minimal Documentation
As LAPs have collateral securing them, only your identity and ownership documents, along with basic financial details, need to be submitted for fast-tracked approvals.
What Property Can Be Pledged?
Most lenders accept self-occupied residential plots, apartments, independent houses, commercial spaces and standalone properties for securing micro loans. Permitted properties for LAPs should meet these criteria:
- Located within municipal limits with clear titles
- Have occupation certificates and approved building plans
- Free of other encumbrances and loans
Lending companies can finance up to 75% of your property's market value. The remaining 25% provides your equity component in the asset.
How Can Your Business Utilise Micro Loans Against Property?
Entrepreneurs can invest the versatile LAP capital in any legitimate requirement, right from starting a venture to supporting established yet growing enterprises. Some prominent usage scenarios are:
- Expanding Product Portfolios: Introduce new products, variations and personalisations by using LAP funds to increase your manufacturing abilities or hire skilled staff.
- Upgrading Equipment: Replace outdated tools and machines with advanced equipment through LAP capex financing to augment productivity.
- Smoothening Cash Flows: Servicing critical operating expenses using LAP amounts can help manage business cycle fluctuations, such as delayed payments or seasonally slow quarters.
- Bridging Temporary Capital Gaps: Avail micro loan flexibility to immediately resolve pressing needs like procuring renewable stocks instead of waiting until you generate surplus internal accruals.
- Hiring More Employees: Ramp up skilled staff strength by utilising LAP capital to attract, train and retain talent without pressuring limited company reserves.
- Renovating Premises: Give your enterprise its best foot forward by funding property improvements, facelifts or office relocation through affordable LAPs.
In essence, the flexible funding afforded by these microloans against property can be channelled towards any valid short or long-term requirement to facilitate your establishment’s multifold objectives.
Things to Consider While Availing a LAP
While LAPs furnish welcome financing avenues for India’s solopreneurs and emerging enterprises, they also account for these vital aspects when applying:
- Research Interest Rates: Compare base rates and processing fees between financial institutions, as even small variations can impact overall costs.
- Evaluate the LTV: Check the loan-to-value ratio permitted against your property's market price to estimate the loan amount eligibility.
- Assess the EMI Burden: Gauge if your enterprise can service proposed EMIs through existing and projected revenue streams without hampering daily operations or growth plans.
- Read All Terms: Scrutinise processing timelines, prepayment clauses and other T&Cs so there are no surprises later. Also, clarify any doubts beforehand.
- Check Property Documents: Ensure papers confirming legitimate ownership and usage are in order before applying for the micro loan against your real estate.
Conclusion
Securing financing against owned assets opens up funding avenues that might be closed off for early-stage enterprises. Evaluate your goals and cash flow capacities along with market interest rates to determine if a micro loan for entrepreneurs makes sense for growing your ambitious small business without external equity dilution. If you want to explore micro loans against property, Shriram Finance comes with transparent terms and helpful tools like EMI calculators, making it easier to plan your next phase of business growth.
