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Business loan vs LAP: What to opt for in the current scenario?

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In the pre-pandemic era, most borrowers would consider availing business loans versus LAPs, through informal lending channels.

Business loan vs LAP: What to opt for in the current scenario?
2020 has been a lesson in dichotomy. The year of challenges has simultaneously witnessed the birth, growth and expansion of agile enterprises and exposed vulnerabilities of enterprises that staggered under the baggage of operational inefficiencies and slow reaction.
Similarly, the year has seen the burgeoning of home businesses and job losses in equal measure. Most importantly, the year has seen discretionary spending come down drastically while witnessing an increase in the need for liquidity.
As economic activity revives and businesses seek to cover lost ground, working capital would be the most pertinent need for entrepreneurs, be it for business expansion, reviving business posts, sustained lack of revenue, delayed vendor payments, or even continue paying salaries of employees.
Access to business credit in India has always been a formidable challenge for small and medium enterprises in India despite their contributions to over 30 percent of the country’s GDP and accounting for over 45 percent of exports. The situation is only set to worsen in the post-pandemic scenario. As lenders become cautionary in their loan disbursal, non-formal channels of credit could prove to be more expensive.
Furthermore, the creditworthiness of borrowers would be under immense scrutiny and subject to stringent approvals, prior to being dispensed, translating to documentation and detailed credit histories that many small enterprises may be unable to give.
In such a scenario, the question arises as to how do businesses in India, gain access to much-needed credit and liquidity to quicken the pace of their recovery and contribute to reviving the country’s overall economic well-being? The answer could well be Loans Against Property or LAPs, as they are most commonly known.
In the pre-pandemic era, most borrowers would consider availing business loans versus LAPs, through informal lending channels. However, in the post COVID era, LAPs could ideally be the best-suited solution for accessible credit, both for lenders and businesses.
Some of the key benefits are as enumerated below –
Low cost of credit
Loan against property, as the name suggests, are secured loans approved against commercial or residential property as collateral. Hence, borrowers are able to avail larger ticket size loans for longer tenures, at a low cost of interest. This translates to effective cash flows without heavy EMI payments, making it possible for entrepreneurs to avail of the requisite capital needed for expansion without being stressed about how to pay it all back.
The longer tenure of the loan allows you to take business decisions based on reason and need versus emotion and quicker returns. Business expansion takes time to implement, succeed and lastly, be profitable enough to cover expenses and provide returns. In most cases, LAPs offer tenure of 15 to 20 years for repayment. This combined with economical EMIs, allows entrepreneurs to make sound decisions with regards to opening a new office or factory, recruit employees, advertise and build a customer base, etc., without the stress of capital or repayment, as it provides ample time for the business to break even and be profitable.
Flexibility
Business can be unpredictable. A good entrepreneur ensures he has a constant inflow of capital to ensure that he is able to combat such unpredictability with ease. LAPs, thus, provide an ideal solution for the need for funds. Several lenders offer flexibility in terms of loans needed and how to pay them back. For example, once your collateral is appraised and the disbursal amount agreed upon, a borrower can decide how much of that loan amount he wishes to avail at a given time.
You may choose to simply opt for 50 percent of the loan today and keep the remaining in reserve for later use. You only pay interest on the sum availed of but have the added benefit of availing the residual loan as and when needed. This can also help you monitor your EMI outflow better and manage your capital requirements effectively.
Top-ups
In addition to the longer tenure, economic rate of interest and flexibility, LAPs allow you to avail of top-ups as needed to cater to any unforeseen exigencies needing extra capital. This is given at the discretion of the lender for the improvement of property or any repairs that the property may need. However, this is only possible if the lender offers this facility and if the property valuation is enough to cover the additional loan requirement.
While a borrower can choose between LAP and business or personal loans to meet their capital requirements, LAPs offer better benefits when compared to the latter, as described above. The sheer ease of payment and long-term economy of LAPs, ensure that the cost of debt outweighs the interest payable, over the long term.
In the current scenario, with lending becoming cautious and difficult to secure, LAPs offer requisite guarantees on repayment thereby affording borrowers and lenders a secure mode of transacting credit and can ease access to credit for the MSME industry significantly.
The writer, Atul Monga, is Co-founder & CEO, at BASIC Home Loan
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