If you’ve ever run a business or closely seen someone running a business, you’ll know how much money you need to keep putting in regularly. The need for working capital money keeps arising now and then and it gets difficult in times when the business is cash crunched or needs to be taken to the next level. That’s where the realization dawns that money needs to be borrowed.
Although borrowing money from family or friends is usually the easiest, it gets difficult when the amount needed is larger. In such cases, it’s better to borrow from a bank or a financial institution whose prime objective is to provide money to people in need in the form of loans. There are many types of loans, which can be broadly classified as secured and unsecured. Secured loans are the ones, which are given against collateral while unsecured, do not require collateral.
It’s better to take up secured loans as you can get higher amounts when you have something to offer as collateral in exchange. Termed as loans against assets, these loans are given in exchange of a guarantee against an owned asset that if you cannot repay the bank, it has the right to sell the pledged asset and recover its dues. By using the collateral, the lender takes lesser risk and in exchange gives you a higher funding.
Loans against assets are an assurance to the lender that they won’t lose all their money. There are various type of assets you can use to get loans such as automobiles, real estate which can be a house or a land, cash accounts, investments, insurance policies, valuables such as gold, inventories or equipment in case of businesses.
Although it sounds simple to just get money against your assets, a lot goes in the actual processing of the one. Once you have decided to take a loan, the bank/lender does its due diligence by checking out the documents, finding out the market value and offering up to 70% of the value of your asset as a loan. For businesses, they also check the company’s history, balance sheets and other revenues. They also check your credit history through CIBIL to check your repayment track record.
Typically banks give loans against assets for anything between 1-9 years, it can stretch to 15 years if the amount is bigger. Interest rate usually varies between 12-16%, much cheaper than personal loans, which can go up to 25% at times.
The perks of using a loan for business is that you can claim the entire interest amount as a tax deduction by proving that the loan was used for improvisation of the business. With lesser interest rates as compared to an entrepreneur taking up a personal loan, loans against assets work well for businesses.
