One more option of sourcing funds is to obtain a loan against your assets, for example, a loan against property is especially useful for such purposes. However, there are specific loans to be availed for precisely this function that are termed under the category of business or commercial loans.

Being an entrepreneur or even aspiring to be one is not an easy task. It might be easy to come up with an idea or maybe even set it rolling. However, to ensure that the business idea takes off successfully or the company can grow so that there are substantial profits, there are a lot of factors that needs to be looked at – manpower, target audience, etc. Also, there is another factor which is very important and which most of us would have thought of even before thinking about the above mentioned factors – capital investment. First and foremost you need to have money to start or expand your own business.

The traditional way of raising money for your business is by borrowing from family or relatives, scouting for investors who would be interested or partnering with friends who have the money to invest. In the case of privates investors, those who are convinced about your business model would be willing to provide the funds needed for your business venture. One more option of sourcing funds is to obtain a loan against your assets, for example, a loan against property is especially useful for such purposes. However, there are specific loans to be availed for precisely this function that are termed under the category of business or commercial loans.

This is a popular category of loans offered by almost all banks in both public as well as private sector. The main aim of a commercial loan is to help traders, businessmen and professionals, start or expand their commercial activities. These loans can be used to buy necessary equipments, recruitment of manpower, stationeries, renting office premises, expanding, modernizing or improving business etc. In fact, business loans help you cover the cost of every aspect of your business requirements.

There are two types of commercial loans:

Professional Loans

Professional loans are given to self employed professionals such as doctors, chartered accountants etc.). Even though it varies from bank to bank, banks give from Rs. 25,000 to Rs. 25 L. Also, there are many instances when some kind of security or collateral (mortgage of non- agricultural land, National Savings Certificates, Government Bonds, Bank’s Term Deposits, and Assignment of Life Insurance Policies etc.) is required, for loan amounts exceeding Rs.15 L. These loans should be paid back in a period of 5 years depending on the bank.

Documents required:

• Complete business plan
• Personal financial statements
• Collateral to secure the loan (if amount exceeds Rs. 15, 00, 000)
• Incorporation documents, proof of ownership or sale if the business was purchased
• Tax returns and credit references

Trade Loans

Trade loans are given to traders and businessmen. Present day trading involves heavy initial investment and pooling in continuous financial resources. Banks are providing trade loans to traders / businessmen to help them set up or expand their business. Even though it varies from bank to bank, banks give from Rs. 25, 000 to Rs.35L. Even for trade loans, some banks ask security or collateral. Some banks suggest investing a certain minimum margin of profits from business, as fixed deposits to assure security for the loan taken. Other criteria taken into consideration for the amount lent towards these business loans include current financial standing, repayment capacity, duration of the loan period etc. These loans have to be paid back in a period of 5 years.

Documents required:

• Proof of business existence for at least two years
• Financial Statements including Balance Sheet and P/L statement for the last three years
• Proof of residence
• Proof of place of business

The interest rates applicable for both these types of loan range anywhere between 8% and 15%.Generally you are expected to repay the amount in a maximum period of 5 years and some banks provide you with options in the choice of periodicity of repayment. For eg. You could have a choice of monthly, quarterly, half-yearly repayment periods from the commencement of the loan.

Loan against property can be taken against a self-occupied residence or a commercial building. The main requirement on the bank’s (lender’s) part is that there should not be any other encumbrance.LAP is the most secure of loans hence the lending rate is generally very low compared to other loans.

Want money for your Child’s marriage? Or to fund your business expansion? Well the money is already in your house! Read further…

Loans generally can be classified as secured or unsecured. Personal loans and Credit cards come under the un-secured loans category because we are not pledging any of our assets (collateral) to get the loan. Housing loans, loan against property (LAP), loan against shares (LAs), and car loans come under the secured loan category as there are collaterals involved.

LAP

Loan against property can be taken against a self-occupied residence or a commercial building. The main requirement on the bank’s (lender’s) part is that there should not be any other encumbrance.

Lap is the most secure of loans hence the lending rate is generally very low compared to other loans. However, because of the structure of lending by banks, they tend to be slightly higher than housing loans.

The eligibility criteria for getting LAP is also liberal, as the property is available as collateral. The repayment term can also be long from 5 to 15 years.

When to look at LAP?

For anyone who has a house or commercial property and is looking for a loan, LAP should be the first option. The only loan with better features could be the gold loan. But there could be a lot of sentiments attached to pledging gold, so it generally gets done as the last alternative. That leaves the LAP as the better choice.

Though a housing loan and the LAP are secured against the property, LAP is on the existing property and the value of the property is released for productive activity. For a businessman looking to expand business, a LAP comes in handy. As they do not have to look for costly sources and the processing is also much faster. A few banks may even give an overdraft facility against the property; this will help the business as interest will need to be paid only for the amount withdrawn.

Funding children’s education can also be done using LAP; also their marriages. But as a general rule, one has to be a cautious when taking loans for expenses.

Advantages of LAP

Lap has a number of typical advantages:

1. Value of the asset owned is released for productive use.
2. Processing is faster than a housing loan as the property is already in our possession.
3. Partial pre-closure is allowed without any penalties. This is an advantage as the overall interest burden or the tenure of the loan can be reduced by paying small additional amount (some banks permit a minimum part payment of Rs.5000/- most start at Rs.10,000/-).
4. If the value of the property has risen over a period of time, a re-financing option can be used to increase the loan amount. This feature again is very useful for businessmen, who are on an expansion spree. They can use the same property to continuously build the business.
5. The property continues to be in the ownership of the borrower. In case the borrowers are not able to pay the loan, they can sell the property and then settle the loan. This may leave surplus cash for the borrowers to restart their financial life.

Some Disadvantages of LAP

1. Banks generally do not give loans beyond 60% of the value of a house property and 50% of a commercial property.
2. New businesses generally cannot have access to LAP. They should have been in existence for at least 3 years. Salaried persons of course can get it if they are employed for over 1 year itself.
3. There will be some processing charges usually in the range of 0.5% to 1% depending on the support given by the bank. Some banks may ask us to do the running around to get the encumbrance certificate and legal opinion ourselves and charge us lesser.

Points to be Cautious About

Loan Against Property by itself is a very benign loan. So there is not much to be afraid about. However, there are a few points to be cautious about:

1. Fixed Vs Floating Loan Conundrum: As in a housing loan, in LAP too a decision has to be taken related to this. In a low interest rate regime it is always better to take up a fixed interest rate. However clauses related to jacking the slabs up even in a fixed interest rate loan needs to be verified. For floating rates, the increase and decrease bands have to be checked.

1. Inadvertent Shift from Overdraft to EMI: Some smart (unethical!!!) salesman may sell off a LAP in EMI format to businessmen seeking an overdraft. This causes unexpected high cash flows for the business.

1. Assessment of Property Value: Support from the owners to give the deeds of recent sales in the neighborhood will help the underwriters of the bank in assessing the value of the property better. Generally they tread on the cautious side.

1. Partnership Business: In a partnership, LAP can raise some issues among the partners on – Whose property is to be pledged? This is particularly a problem if at a latter point in time one or some of the partners wish to leave the business.

Photo credits : Huntz

This is not specifically a category of loan but more a loan for which an exhaustive set of documents are required. There are several conditions that need to be fulfilled while taking a loan. One of these is the kind of documentation you have to complete or submit to the bank before the loan is approved. There are two categories here – documents for salaried professionals and documents for self-employed professionals.

Loans are something that is needed by most of us who are salaried or self-employed at one point in time or the other. There is a plethora of the kinds of loans available today - personal loans, car loans, housing loans etc. The list keeps going. Let’s take a look at one category of loans provided by banks – Loans for Professionals.

This is not specifically a category of loan but more a loan for which an exhaustive set of documents are required. There are several conditions that need to be fulfilled while taking a loan. One of these is the kind of documentation you have to complete or submit to the bank before the loan is approved. There are two categories here – documents for salaried professionals and documents for self-employed professionals.

People like Doctors, Chartered Accountants, Interior Decorators, Architects, Company Secretary etc. fall in the category of self-employed professionals. Listed below are the different categories of documents that a self-employed professional has to fulfil.

Financial Documents

Unlike an individual who is salaried and gets a Form 16 from the employer at the end of the year, a self-employed person seeking a personal loan does not get such income proof. Therefore, the documents that a self-employed professional can submit for fulfilling this kind of a category are the profit and loss account and balance sheet. These are the basic documents that will give an idea about the overall situation of the person’s business.

Tax information

Apart from the financial information, the individual also needs to supply the necessary tax information. This will act as the backup for the other financial information that has been presented earlier. This has to be provided in the form of the income tax returns of the past two/three years and/or the computation of income certified by a chartered accountant as this will confirm that the necessary earnings are present for the individual. This confirmation in addition to the other documents of the business will complete the financial aspect of the overall requirements.

Professional work

Banks that give personal loans provide a benefit for the individual in the form of a loan without any security. There are several conditions under which a favourable treatment is available but often people miss out on them. One of them is the seniority in the profession. Many banks provide better facilities to a person who is senior in the profession and it is vital that the individual furnishes the details that will show his/her standing in the industry and the time spent in the profession. So apart from the qualification proof that is provided in the form of certificates there should also be a business continuity proof. This can result in a benefit in either of the two areas where the limit for the loan is actually increased or where other conditions are relaxed. This makes the servicing of the loan easier for the person. All these conditions taken together can ensure that the necessary documentation is complete for a self-employed person and the personal loan is made available.

Here is a list of documents that a self-employed professional may need to furnish:

• Proof of Identity (Passport Copy/ Voters ID card/ Driving License).
• Address Proof (Ration card Tel/electricity Bill/ Passport )
• Bank Statements (latest 6 months bank statement /passbook)
• Latest ITR along with computation of income, Balance Sheet & Profit & Loss account for the last 2 yrs. certified by a CA
• Qualification proof of the highest professional degree
• Proof of continuation (Trade license /Establishment / Sales Tax certificate)
• Other Mandatory Documents (Sole Proprietorship Declaration Or Certified Copy of Partnership Deed, Certified Copy of MOA, AOA & Board resolution.)

The Maximum Amount offered as Professional Loans varies in banks, depending on the financial standing of the customer, his repayment capacity, tenure of the loan etc. Banks generally provide loan from Rs.25000 to Rs.25 lakhs. The interest rates vary only slightly from the normal lending rates of the banks.