Loan against property
or LAP is a good source of funds for small businesses and entrepreneurs. However, with the National Housing Bank
(NHB) planning to cap the percentage of loan a housing finance company can offer to a borrower against a mortgaged property, this source of funds may soon dry up.
In fact, many lenders have already started going slow on LAP in the recent months. “The loan books of the entities that grew at 40 per cent and 30 per cent in the financial years 2015 and 2016 respectively. In the financial year 2017, the growth slowed down to 17 per cent – the lowest in a decade,” according to credit rating agency ICRA.
Most of the loans offered against properties are for commercial purpose. “Business owners prefer LAP as it is the quickest and easiest way to raise funds,” says Amitabh Chaturvedi, managing director at Essel Finance.
While LAP may be the easiest way to get a loan, small businesses and entrepreneurs can look at alternative ways to raise capital for business. The business owner can approach banks or non-banking finance companies (NBFC) for unsecured business loans. The lender looks at books of accounts and if the business generates cash flow, the owner can get a loan without any security or collateral. This is also the most expensive business loan offered at 20-22 per cent. A loan against receivables or plant and machinery is available at a rate of 17-19 per cent and 15-18 per cent, respectively.
Some banks and NBFCs specialises in such loans. These loans also take 15 days or more to get sanctioned. Lenders have chartered accountants empanelled that evaluate the business and book of account and submit a report on which the lender takes a call. A business owner, therefore, needs to go through a lot of paperwork.
Many public sector banks also provide a short-term loan called as cash credit limit. “While the interest rates are not high, it can take up to six months to get it sanctioned and the lenders need collateral as well as a mortgage to open up a cash credit,” says Amit Mittal, founder and chief consultant officer at eSilverbucks.
If you are looking for a smaller loan, up to Rs 10 lakh, you can also look at peer-to-peer (P2P) lending websites. Faircent, a P2P platform, charges Rs 500 for registration. Depending on the risk profile of the borrower, it charges 2-4 per cent as processing fees. “If it’s a high a high-value loan – more than Rs 5 lakh – then we too send an official to visit the business owner and verify the information such as the stock he is holding, receivables, etc,” says Rajat Gandhi, founder & CEO of Faircent.
While angel investors and seed funds are an option, crowdfunding platforms are good option if the product or services are yet to be launched.
The government is also running schemes to provide capital to small business owners and entrepreneur but each scheme has different eligibility criteria that the business owner needs to check. Naveen Kukreja, CEO and co-founder of Paisabazaar.com, suggest business owners explore schemes such as Credit Guarantee Fund for micro and small enterprises, SIDBI’s Soft Loan Fund and Start-Up India Scheme.