Synopsis: In today’s article, we will break down why it makes sense for business owners to get a loan against commercial property and the procedure for applying for it. 

There are umpteen credit options available to MSMEs to hand-pick from to raise funds, and Loan Against Property (LAP) is one of them. A loan against property is a secured loan issued by lenders against a pledged property, usually at low-interest rates.  

Primarily, LAP is secured against either a residential property or a commercial property. Residential properties include fully-constructed individual houses, flats, or apartments. In comparison, commercial properties include office premises and retail shops. 

But what exactly is a loan against commercial property, and why is it a popular loan option among manufacturers and retail businesses? Let’s understand in detail. 

What is Loan Against Commercial Property 

A loan against commercial property is a type of loan secured through a mortgage of a commercial building instead of a residential property. The amount of loan extended is usually limited to 70% of the pledged property’s current market value. 

For the purpose of this loan, the commercial property would comprise a self-occupied, rented, or even vacant: 

• Office premises 
• Showroom 
• Shops 

Such loans are provided by banks, NBFCs, or digital lenders against fully constructed and ready-to-use commercial properties. This means a loan against commercial property cannot be secured against under-construction properties. 

Furthermore, commercial properties should already hold all the required permits and approvals from respective authorities and be litigation-free. 

General Eligibility Criteria to Qualify for a Loan Against Commercial Property

To get a loan against commercial property in India, borrowers must be Indian nationals earning a steady stream of income. Further, they must own fully constructed commercial properties, such as office premises or a retail outlet, which are bereft of any legal concerns. 

While the finer details regarding eligibility criteria will differ from lender to lender, they ideally prefer borrowers with a good CIBIL score of 750 or more. A thick credit file ensures that loans can be sanctioned at lower rates of interest. 

Unlike various other lending institutions, Protium extends LAP to MSMEs that have trouble accessing structured finance due to poor credit history. We offer flexible loan terms, which enable you to not only pay back your loans timely but also build up your credit score, thus becoming eligible for better loans in the future. 

Documentation for Loan Against Commercial Property 

As mentioned above, since the eligibility criteria vary as per the lender, so do the document requirements. However, lenders generally require the following documents at the time of filing a LAP application: 

Identity and Address Proof: PAN card/ Voter’s ID/ Driving License/ Passport/ Aadhaar Card 

Proof of income: Bank account statements and ITR filings 

Property-related: Buyer agreement/ Title deed/ Letter of Allotment/ Certificate of occupancy  

This, by no means, is an exhaustive list. Borrowers may be required to furnish more documents upon further inspection of their loan application. 

7 Reasons Why a Loan Against Commercial Property is a Good Idea 

Applying for a LAP secured against commercial property can provide you with multitudinous benefits, which have been listed below. 

1. No end-use restriction 

The amount sanctioned against a commercial property can be utilized for any legitimate purpose, including business expansion, debt consolidation, working capital investment, home renovation, and other personal expenses. 

2. Substantial amount of money 

A high-value commercial property can fetch a massive sum of money for investment as the LTV (Loan-to-Value) ratio can go up to 70% of the property’s market value. 

3. Flexible eligibility criteria 

For the purposes of loans against commercial property, borrowers have the option to club their individual and business income together to meet the eligibility criteria, thus providing them with more flexibility. Additionally, a LAP requires no guarantors. However, all the co-owners of the commercial property will mandatorily need to be a co-applicant in the loan. 

4. Maximum tenure 

A LAP backed by commercial property can be availed for a very long tenure lasting almost 18 years, subject to age criteria and risk profile. However, borrowers must remember that a longer tenure will result in higher cumulative interest payments, so the LAP terms should be negotiated accordingly. 

5. Lower rate of interest 

A loan against commercial property can be secured at a significantly lower rate of interest than other unsecured loans. The interest rates may have an additional markup of 4-5% if the financial documents exhibit weak strength. 

6. Lower charges 

Unlike unsecured loans, a LAP application usually carries lower processing fees, prepayment and foreclosure charges. While a LAP secured against residential property is processed at a flat rate of Rs. 10,000, 1-4% of the loan amount is charged for sanctioning a LAP secured against commercial property. However, a strong borrower profile may be levied a lower charge, at times going down to 0.5%. 

7. Continued use of the property 

In a loan against commercial property, borrowers can continue to possess and use the property, despite the property rights being transferred to the lender over the term of the loan. A borrower can avail of a LAP simply by depositing the title and legal documents to the lender. 

3 Factors That Affect Loan Against Commercial Property Application 

It’s in the nature of credit to be risky, and a loan against commercial property is no exception.  

1. Extensive technical appraisals affect the expected disbursal amount 

Commercial properties will need to undergo extensive technical appraisals to ensure they are in compliance with all the rules and bye-laws of the land at all times. Lenders usually employ independent appraisal teams who verify every detail before submitting their report. 

Borrowers may see a lower-than-expected disbursal of loans based on how the report paints the picture of the property. This problem becomes even more acute for old properties that usually demand high premiums when located in posh business areas but are afflicted by age-related risks. 

2. Lenders prefer a minimum area to pass the application 

Lenders may refuse to sanction loans against small commercial properties. For example, many retail outlets allocate small space, usually under 100 square feet, to bank ATMs. In such cases, lenders may not find it lucrative enough to process a LAP. As per the norms, lending institutions generally prefer a space of at least 250 square feet to consider a LAP application. 

3. Borrowers face collateral disposal in case of payment defaults 

As lenders hold the legal ownership of the pledged property during the loan tenure, they can dispose of the collateral to secure the amount due when borrowers default on their payments. 

Get LAP at attractive interest rates with Protium  

By unlocking your commercial property’s value through a LAP, you can well be on your way to soaring to new heights, whether business-wise or personally. The materialization of this dream, however, will depend on how extensively you have researched various lenders to shop for the most suitable loan terms. 

Else, you can spare yourself the headache and directly apply for a Loan Against Property at Protium. Call 8828827800 to avail of a LAP at affordable interest rates with flexible repayment options.