Business owners are often looking for capital to expand their business, whether it’s for factory expansion, buying new machinery, investing in the latest technology, digital expansion and marketing, opening additional outlets, or simply just working capital infusion. One effective way for such business owners in India who are sitting on valuable property assets is a Loan Against Property (LAP). Using a LAP, you can leverage the value of your residential, commercial, or industrial property without selling the asset.
They are cost-effective compared to business loans, as they carry an interest rate typically in the range of 8%-14% as opposed to a business loan, which can vary between 16% and 24%. Thus, they are significantly cheaper for long-term needs. Loan amounts can go up to 70%-75% of the property value depending on the property type and can extend to a 15-year tenure depending on age at maturity.
What is a loan against a property for a business in India?
In simple terms, in a loan against property, you mortgage your owned property, whether it’s residential, commercial, or industrial, to a bank or NBFC in exchange for a loan. This can be a term loan or a dropline overdraft. There is no change in property ownership; the bank only creates a charge against the property, and the original papers are submitted with the lender till the time the loan is not closed.
This is a particularly lucrative product for business owners since banks do not micromanage fund deployment as long as the funds are being deployed towards business and legitimate purposes. They can be used for a combination of things like buying raw materials, purchasing commercial or industrial property for expansion, purchasing plant and machinery, debt consolidation, creditor payments, etc.
What are the documents required for a LAP in India?
Loan sanctioning by banks comprises 2 key aspects: property valuation and income eligibility. Documents required reflect a combination of these things only, which help judge the banks’ ability to sanction the amount:
Know your customer and identity documents:
These comprise a PAN card and Aadhar card as mandatory documents for all individuals and address proof as an additional document if different from the Aadhar card. Identity and address documents are required for all applicants, whether it’s an individual or a proprietorship / Pvt. Ltd. / partnership / LLP, etc. In the case of Pvt. Ltd. companies and LLPs, MOA, AOA, Certificate of Incorporation, Partnership deed (LLPs), etc., become mandatory documents.
Income Documents:
For business owners, banks usually require the last 3 years of ITR and computation of income along with audited financials, including a profit and loss statement, balance sheet, and audit report. They will ask for GST returns for the last 12 months along with the GST certificate. They will also need a last 12-month bank statement for the current account along with the last 3 years of 26As for the applicants. They will also ask for your Udyam certificate, etc., for business vintage.
For funds for business expansion, lenders may sometimes ask for a business plan detailing a funds deployment plan or invoices for machinery, etc., which are being bought. They will also ask for loan statements to assess the overall debt situation.
Collateral documents:
This will depend from property to property, but broadly, lenders need chain of title documents starting from the initial allotment letter to the latest registered title deeds like sale deeds/conveyance deeds/gift deeds, etc. In certain cases approved building plans, occupation or completion certificates, and the latest property tax receipts may also be needed.
For industrial properties, additional permission to mortgage or NOC from the local municipal authority or industrial authority may be needed.
What is the importance of a LAP consultant / mortgage advisor for taking a LAP for business expansion in India?
Getting a loan against property, especially for business expansion on industrial or commercial or even residential properties, is much more complex than a home loan application. This scenario is where the LAP advisor can help guide you and add measurable value.
We may be eligible for a higher amount in one bank but not in the second. A LAP consultant will help evaluate your application from both property and financial perspectives and find lenders best suited for your profile and property as per your loan requirements. The LAP consultant will help structure your application and help make it more favorable to the banks by highlighting strong points of your application.
In case your business has seasonal cash flow, they will advise on how to present your cash flows to the bank more favourably. They will also ensure that your property legal is clear before applying for a loan, and in case of any title defects, they will help clear this before applying so you can avoid a rejection from the bank.
Frequently Asked Questions
Q1. What kinds of property can be mortgaged to get LAP for business expansion in India?
Lenders can provide you loans on residential properties like independent houses and flats; commercial properties like your office / showroom, etc.; and industrial properties like factories, warehouses, etc. You can sometimes also get LAP on vacant plots. Industrial and commercial properties, along with plots, normally attract a lower LTV compared to a residential property, so your loan amount may be higher for a residential property.
Q2. What is the LTV against my property for business expansion?
LTV means loan to value, basically the percentage of property value that the lenders can offer as a loan. Mostly lenders offer 50 % – 75 % of market value as appraised by banks’ empanelled valuers as a loan amount subject to income eligibility. Residential property will attract a higher LTV, and others will attract a lower LTV here.
Q3. For an industrial property, what is the interest rate range for LAP in India?
LAP on industrial property can vary from 8.5% to 14.5% depending on borrower profile, property value and type, credit score, etc. Banks usually offer lower rates, and NBFCs tend to offer higher rates but may offer considerably higher loan amounts, as banks are often more strict in their underwriting.
Q4. I have taken a LAP but want to use my funds for working capital needs instead of fixed asset purchase. Is this possible ?
Yes, LAP allows you flexibility to use your funds towards varied purpose as long as they are towards business and legitimate. You may use your funds for working capital needs, credit payments etc as required. Banks may take a broad end use confirmation from you at time for disbursement.
Q5. How many days does it take to get LAP approved in India?
Since this is a complex product with many different kinds of applications, a straightforward application might take anywhere between 7 and 15 working days from the date of submission of complete documents. More complex transactions with multiple approvals may take even up to 6-12 weeks to get sanctioning.
Q6. If I take a LAP, will it be reported in my credit report?
Yes, your lender will report the loan in your credit report like CIBIL / Experian, etc. This will also impact your credit utilization ratio. But if you are making timely payments without delays, this will eventually make your credit report stronger. On the other hand, if you make delayed payments or there are bounces, this will adversely impact your credit score and report.
Q7. What will happen if I default on my LAP?
Since this is a secured loan, the lender has the right to invoke the SARFAESI ACT 2002 and take symbolic possession of the property after serving notice. They will then auction the property to recover the outstanding dues. Thus, it is critical that we make timely payments on all our loans.
Q8: Should I hire a LAP consultant for industrial LAP?
For LAPs, especially on commercial or industrial property, hiring a LAP consultant will always help you secure better rates, a higher loan amount, and an overall better client experience. Their support through the process and help in arranging a higher amount will compensate for the fees they charge.