Loans Against Property (LAP)

Loan against Property (LAP) is 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 any purpose loan, but at the same time secured by collateral of 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 them 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 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 LAPThe loan is secured in nature.Only those who owe 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 unsecured loan.Funds can be used for any personal or business purpose.Best suited for people looking for debt consolidation and business expansionQuantum of loan is high depending on the value of propertyIt increases the future borrowing capacity along with property appreciation.The loan can also be used as a normal overdraft or a drop line 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 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 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.

Many a time it is not possible to raise loans during an emergency for funds in business. Under such circumstances the investments in the form of Fixed Deposits, Govt of India Bonds, and 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.