Published on March 28th, 2021 | by Bibhuranjan0
How to Select the Right Financial Institution for Availing Loan Against Commercial Property
Every business needs funds for various purposes such as equipment upgrade, expansion and sometimes, just for smooth functioning.In such situations, your immovable property can come to your rescue. By offering a property (commercial or residential)as collateral, you can avail a loan for larger amounts (compared to unsecured loans) with longer repayment tenures. Also, you can get it for low interest rates as it is a secured loan.
Applications for loan against commercial property are usually processed quickly. The process is usually straightforward—appraisal of your business and the property offered as collateral, scrutiny of documents followed by the lender’s approval.
Since many financial institutions offer loans against commercial properties, it is not easy to choose the right option. Make sure you consider the following factors before applying for the loan:
Loan Amount and Loan to Value Ratio
Different lenders may offer different sums against the same commercial property you offer as collateral. Shortlist financial institutions that are willing to give you the amount you need. Also, look at the loan to value (LTV) ratio. It means the ratio of the loan offered to the appraised value of the property offered as collateral. Mathematically, it is: Loan amount/Value of the asset x 100. For example, if you have a property worth Rs.50 lakhs and the lender offers Rs.40 lakhs as the loan amount, then it means the LTV is 80%. The loan offered depends on several factors such as the location of the property, age of the building, its condition etc.
Higher the LTV, the better it is from the perspective of the borrower as you get more funds. Compare the LTV being offered by various lenders before applying for a loan.
Compare interest rates offered by different financial institutions for your loan against commercial property. Needless to say, the lower the better. However, you also need to check whether interest is charged on reducing balance or a flat charge, and calculate the total interest you will end up paying.
Check the loan tenure offered by various financial institutions and choose the ones that are most comfortable and convenient for you. Remember, the longer the tenure you choose, more will be the interest you pay in the long run. If you have the capacity to repay the loan in a shorter time, it could be ideal. However, it is good to have the option of a longer repayment tenure, especially in these disruptive times.
Repayment or Installment Payment Modes
There are different modes of loan repayment such as Electronic Clearing System (ECS) which means automatic debit from your bank, online payment, post-dated cheques, National Automated Clearing House(NACH) and so on. Inquire about the options offered by different lenders and pick the one that is most convenient for you.
Ease of Application
Compare the loan application process of different lenders. Do they let you apply online, what is the loan processing time, do they offer doorstep collection of documents and so on. In your busy schedule, you might want to go for the one who offers seamless loan application and disbursal process.
Documentation and processing
Check the documents requested by the lenders and do not forget to read the fine print regarding their approval process. Are they asking for minimal documentation or will you drown in paperwork? Most of the established lender shave a website where they mention the details of their process. Go through each one and choose what suits you best.
Even if you are offering real estate as collateral, the lender may still have a few conditions—they may offer loans only to businesses in specific industries or for specific purposes. Factors such as business feasibility, future cash flow projections, credit score, age etc. could affect the loan approval. Check the eligibility criteria before applying for the loan.
Customer care is an essential part of customer satisfaction. See whether the lender offers customer support for queries through phone, chat or email, and if they are willing to send their executives to your office/residence for document-related work such as collection, signing and so on.
Sometimes with improved cash flow, borrowers get in the position to repay the entire loan amount in one shot before the tenure ends. Most lenders apply a small penalty on loan foreclosures. Compare the foreclosure terms of different lenders and make an informed choice.
Availing loan against commercial property for business purposes is not as complicated as it seems. With thorough research, you can find the financial institution whose terms and conditions suit you best.
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