Loan Against Property

Loan Against Property

A loan against property (LAP) is exactly what the name implies, a loan given or disbursed against the mortgage of property. The loan is given as a certain percentage of the property’s market value, usually around 40 per cent to 65 per cent. Loan against property belongs to the secured loan category where the borrower gives a guarantee by using his property as security. The purpose of the loan is not definite; one can use it for personal or commercial as well. In certain bank this product is designed to meet the requirement of entry level entrepreneur, who does not have any track record of business. They can use this product by way of term loan or working capital facility. Purpose of the loan is to encourage SME green field projects which are at inception and because of lack of capital they could not grew. Procedure involves in this product is relaxed a bit and also rate of interest charged and processing fees is quite attractive. Once the loan is availed the same can be converted into a regular limit after certain period and of course, depend upon financial performance of the company.

Every business needs funds mainly for the following purposes:

  1. To purchase fixed assets: Every type of business needs some fixed assets like land and building, furniture, machinery etc. A large amount of money is required for purchase of these assets.
  2. To meet day-to-day expenses: After establishment of a business, funds are needed to carry out day-to-day operations e.g., purchase of raw materials, payment of rent and taxes, telephone and electricity bills, wages and salaries, etc.
  3. To fund business growth: Growth of business may include expansion of existing line of business as well as adding new lines. To finance such growth, one needs more funds.
  4. To bridge the time gap between production and sales: The amount spent on production is realised only when sales are made. Normally, there is a time gap between production and sales and also between sales and realisation of cash. Hence during this interval, expenses continue to be incurred, for which funds are required.
  5. To meet contingencies: Funds are always required to meet the ups and downs of business and for some unforeseen problems. Suppose, a manufacturer anticipates shortage of raw materials after a period, then he would like to stock the raw materials in large quantity. But he will be able to do so only if sufficient money is available with him.

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