When it comes to business financing, Loan Against Property (LAP) and Working Capital Funding operate on different principles, leading to varying funding limits relative to property value. Here’s a breakdown of why LAP offers lower amounts and working capital funding can exceed the property value:

1. Nature of the Funding

LAP (Secured Loan): LAP is a secured loan where the property acts as collateral. Lenders base the loan amount on the market value of the property, typically offering 50-80% of its value to mitigate their risk.

Working Capital Funding (Unsecured/Partially Secured Loan): Working capital funding is designed to meet immediate operational needs. Lenders assess the business’s cash flow, revenue, and repayment ability, not just collateral value, allowing amounts that can exceed upto 200% of property value.

2. Risk Assessment by Lenders

LAP: Since LAP relies on the property’s value, lenders assume minimal risk and limit the loan amount to ensure they can recover their funds through property liquidation if needed.

Working Capital Funding: This type of funding is riskier for lenders because it often lacks full collateral. To justify the higher funding, lenders assess business performance, profitability, and projected growth.

3. Purpose of the Loan

LAP: This is typically used for long-term investments, such as purchasing machinery, business expansion, or ancillary needs. The funding is based on tangible, liquidatable assets.

Working Capital Funding: This loan is aimed at covering operational expenses like inventory, payroll, or short-term liabilities. The focus is on enabling cash flow continuity, which justifies higher limits based on the business’s earning potential.

4. Loan-to-Value Ratio (LTV) vs. Repayment Capacity

LAP: The LTV ratio for LAP is conservative, typically capped at 50-80% to reduce lender exposure in case of default.

Working Capital Funding: Instead of LTV, lenders consider the business’s Debt-Service Coverage Ratio (DSCR), revenue growth, and repayment capacity. These metrics often justify funding exceeding the property’s value.

5. Repayment Flexibility

LAP: Repayments for LAP are typically spread over a longer tenure, with fixed EMIs. The loan is secured, so lenders prioritize stability over volume.

Working Capital Funding: They are short-term and may have flexible repayment options tied to the business’s cash flow. This dynamic approach allows lenders to offer larger amounts.

6. Risk vs. Return for Lenders

LAP: With a secured asset backing the loan, lenders face limited risk and focus on protecting their principal.

Working Capital Funding: The risk is higher, but lenders compensate the risk with expected cash flow of  business with liquidity, making it viable to extend funding beyond the property’s value.

Conclusion

The difference lies in the collateral dependency for LAP and the business potential assessment for working capital funding. While LAP is tied to property value, working capital funding leverages the earning power and growth trajectory of your business, offering greater flexibility to support operational needs.

Here at NKB Kredit, we specialize in secured funding by offering funding up to 200% of property value, ensuring maximum leverage for your business growth. With expert guidance and hassle-free processing, we make your funding journey seamless and efficient.