Why Loan Against Property Offers Less and Working Capital Funding Offers More Than Property Value
When it comes to business financing, Loan Against Property (LAP) and Working Capital Funding follow different principles. This results in varying loan limits relative to the property value. Let’s break down why LAP usually offers lower funding, while working capital funding can exceed even 200% of the property’s value.
1. Nature of the Funding
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LAP is a secured loan where the property acts as collateral. Lenders offer 50–80% of the market value of the property to minimize their risk exposure.
This funding type aims to cover short-term financial needs associated with daily business activities. Rather than primarily relying on collateral, lenders evaluate factors such as cash flow, profitability, and repayment capacity. This can enable them to provide funding that can reach up to 200% of the asset’s worth.
2. Risk Assessment by Lenders
LAP:
Since the loan is secured by a tangible asset (property), lenders keep the loan amount limited to ensure they can recover their money through asset liquidation, if needed.
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This is riskier for lenders due to limited or no collateral. To mitigate risk, lenders assess the business’s profitability, growth potential, and past performance before disbursing larger amounts.
3. Purpose of the Loan
Loan Against Property:
Typically used for long-term investments like machinery purchase, expansion, or capital expenses. Since it’s asset-based, the loan is tightly linked to property value.
Meant for daily operational needs such as payroll, inventory, vendor payments, and cash flow management. Its goal is to maintain business continuity — hence, the higher funding allowance.
4. LTV Compared to Repayment Ability
LAP:
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The Loan-to-Value (LTV) ratio is kept relatively low, usually ranging from 50% to 80%, based on the property and the lender’s tolerance for risk.
Instead of LTV, lenders consider the Debt-Service Coverage Ratio (DSCR) and anticipated cash flow. Good ability to repay the loan can support substantial loan values, sometimes exceeding the property’s market price.
5. Repayment Flexibility
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LAP:
Usually comes with fixed EMIs and longer repayment tenures (5–15 years). Since it’s secured, the lender emphasizes repayment stability over high funding volumes.
Often has flexible repayment options (monthly, quarterly, or invoice-based) tailored to the business’s cash flow cycles. This agility allows lenders to disburse higher funds confidently.
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6. Risk vs. Return for Lenders
LAP:
Lenders enjoy low risk due to collateral security. Their focus remains on protecting the principal amount.
Risk is higher, but lenders are compensated through higher interest rates and a business’s earning potential, making larger loan approvals viable.
The key difference lies in collateral dependence vs. cash flow evaluation. Loan Against Property is limited by the value of a physical asset, while working capital funding is driven by your business’s earning power and financial performance.
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Why Choose NKB Kredit?
At NKB Kredit, we go beyond traditional limits. We specialize in secured business funding and offer working capital loans up to 200% of your property value, helping your business unlock maximum growth potential. Our experts ensure quick approval, smooth documentation, and tailored financial solutions.
Frequently Asked Questions (FAQs)
Yes. Unlike LAP, working capital funding is based on the business’s financial strength, not just collateral. That’s why funding can go up to 200% or more of the property value.
If you need long-term funding with lower interest rates, LAP is ideal. But for short-term operational needs, working capital loans offer quicker access and more flexibility.
Not necessarily. While interest rates may be higher, the repayment flexibility and faster processing often outweigh the risks for businesses with steady cash flow.
Basic KYC, business financials, bank statements, and GST returns are typically required. Some lenders may also ask for property documents if partial security is involved.
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