Starting and establishing a business can be tricky for someone just venturing into the professional arena. It requires much effort, experience, and, most importantly, capital investments. If you don't have easy access to funds, your business and personal finances might suffer. So, what are your options? An online business loan or a loan against property? To decide, you need to understand these two different financing choices.
What Is a Business Loan?
A business loan is a type of loan that is made to meet your business's financial needs. You can use them to expand, work capital, buy inventory equipment, or hire staff. These loans are usually unsecured, so you don't need to provide collateral. Instead, the loan provider will assess your creditworthiness and business performance to decide the loan amount, interest rate, and repayment terms.
Repayment of the loan amount and interest are agreed upon over time. You must provide the banks or Non-Banking Financial Companies (NBFCs) with a strong business plan and financial records. These documents demonstrate your intended use of the funds and your capacity to repay the loan. Your credit history and your business's current financial state will also be considered.
What is a Loan Against Property?
A loan against property is a type of loan where you can borrow a substantial amount of money by mortgaging your home or commercial property to the loan provider. This type of loan is popular for businesses that need a large sum of money.
You must own a property that you are willing to use as security to avail of the loan against the property. The bank, financial institutions or loan providers will evaluate your property's value and decide how much they can lend you depending on that assessed value. Then, you get the loan amount to use for various purposes (such as funding a business, paying off debts, and more)
Parameters for Evaluating the Differences between Loan against Property vs Business Loan
The following are the parameters evaluating the differences between business loan against property vs business loans:
The Amount of Loan
The amount you can borrow with a business loan depends on your credit history. You might qualify for a larger loan if you have a strong credit history with no missed payments. This is because loan providers see you as a low-risk borrower. On the other hand, if your credit history has problems, like missed payments or high debt, you might be offered a smaller loan or higher interest rates.
Interest Rate
The rate of interest is crucial when choosing a financial loan. They are based on the credit risk involved. Business loans are unsecured. So, loan providers cannot recover the loss if you default. Thus, the financial institute charges a higher interest rate to cover this risk.
In contrast, a loan against property is secured by your property, so it reduces the risk. If you default, the lending institution can sell the property to recover the amount. That might lead to lower interest rates for this type of loan.
Flexibility in Using the Funds
Many people think that business loans and loans against property offer flexibility in how you can use the funds. Business loans do offer some flexibility. However, they are primarily meant for business-related expenses. So, you can't use them for personal expenses. However, with a loan against property, you can use the money for personal as well as business expenses.
Repayment Tenure
The repayment period directly affects your budget. A shorter repayment term means higher EMIs but lower interest payments. On the other hand, a longer term reduces the EMI but increases the total interest paid.
Differences between Loan against Property vs Business Loan
Here's a table comparing the business loan against property and business loans based on the mentioned parameters:
| Parameter | Business Loan Against Property | Business Loan |
| Interest Rate | Lower, as the loan is secured by the property | Higher, as the loan is unsecured |
| Flexibility in Use | It can be used for both personal and business expenses | Primarily for business-related expenses |
Wrapping up
So, consider your financial needs, repayment ability, and long-term goals when deciding between a loan against property and a business loan. You must select the option that best supports your business or personal needs.
