A Comprehensive Guide To Business Loans Against Property And Shares

Starting a small business can be a thrilling and rewarding endeavour, but it often requires significant financial investment. For many entrepreneurs, securing funding is a critical step in turning their dreams into reality. Fortunately, there are various options available, including small business loans for startups. In this guide, we will explore two common types of financing: business loans against property and loans against shares promoter funding. We will also explain the concept of loan against physical shares and the role of non-banking finance companies in providing such loans. Additionally, we will touch on how to arrange loans from banks. Let us dive in!

Business Loans Against Property:

Business loans against property, also known as secured business loans, involve using a property or real estate asset as collateral to obtain funding. This type of loan provides the lender with a sense of security, as they have the option to sell the property to recover the outstanding debt if the borrower defaults on the loan. As a startup, using personal or business property as collateral can be a viable option if you have valuable assets and are confident in your ability to repay the loan. The loan amount and terms are typically influenced by the property's value and the borrower's creditworthiness.

Pros: Lower interest rates: Since the loan is secured, lenders often offer lower interest rates compared to unsecured loans.

Higher loan amount: The collateral's value allows you to access larger loan amounts.

Longer repayment tenure: Secured loans often come with extended repayment periods, easing the financial burden on the borrower.

Loans Against Shares Promoter Funding:

Loans against shares promoter funding cater specifically to business promoters or major shareholders who wish to raise capital by pledging their shares. In this scenario, shares of the company act as collateral, and the loan amount is determined based on the value of these shares. Promoters often use such loans to inject funds into the business, undertake expansion plans, or finance new projects.

Pros: Access to quick funding: The loan application and approval process are typically faster compared to traditional business loans.

Retaining ownership: Promoters can continue to retain ownership and control of the business while using the pledged shares as collateral.

Loan Against Physical Shares:

In the past, shares of companies were issued as physical certificates. Although electronic shares have become the norm, some people may still hold physical share certificates. A loan against physical shares allows individuals to use these certificates as collateral to secure funding. The process involves pledging the physical shares to the lender temporarily.

Pros:

Utilizing old assets: People with physical share certificates can unlock the value of these assets without selling them.

Borrower-friendly: The requirements for such loans may be more relaxed compared to traditional bank loans.

Non-Banking Finance Company (NBFC):

A Non-Banking Finance Company (NBFC) is a financial institution that provides various banking services like loans, advances, and investments but does not hold a banking license. These institutions play a vital role in the financial ecosystem by catering to the credit needs of individuals and businesses, especially those who may not qualify for loans from traditional banks. NBFCs often offer specialized products and may be more flexible in their lending criteria, making them a viable option for startups and small businesses seeking funding.

Arranging a Loan from Banks:

When it comes to arranging a loan from banks, the process involves several key steps:

Determine your loan requirements: Analyse your funding needs, repayment capacity, and the purpose of the loan.

Choose the right bank: Research and compare the loan offerings from various banks to find the most suitable option for your business.

Prepare necessary documents: Gather all the required documents, such as business plans, financial statements, ID proofs, and collateral documents (if applicable).

Submit your loan application: Complete the loan application form and submit it to the chosen bank along with the supporting documents.

Loan evaluation and approval: The bank will evaluate your application, including your creditworthiness, business viability, and collateral (if any). The approval process may take some time.

Loan disbursal: Once your loan is approved, the bank will disburse the funds to your account as per the agreed terms.