Loan Against Commercial Property – Important Things to Know About the Financing Option

The last two decades has witnessed the financial market expanding. And penetrating the remotest locations in India to provide necessary funding options. This market also saw a lateral growth in the type of funding options one could avail. With several bifurcations and customisations to suit and reach out to diverse borrower segments. Among all such borrowing options available today, loan against commercial property has witnessed a sharp increase in demand especially among the business class of the country.

As despite the intersection between the type of financing needs and loan availability. Indians prefer to keep personal and professional financing separate. The rise in new business undertakings has simultaneously increased the demand for commercial property loans as well. In this context, let us better understand what a commercial property loan comprises. And other pertinent details for a better comprehension and decision regarding the loan option.

Loan Against Commercial Property – Meaning and Scope

A loan against commercial property is a secured funding option that requires one to provide an asset as collateral to avail the necessary finance. As the name suggests, it takes into consideration only commercial properties such as land, building, shop, plant, and machinery. And the likes for successful funding. 

Lenders extend the loan amount as a percentage of the current market value of the commercial property collateralised based on the applicant’s eligibility. Such cap on the maximum financing value available to an individual is decided as per the LTV or Loan to Value ration the lender agrees to provide. With some of the best lenders in the market. LTV for a commercial property loan can go up to 90% of the property’s current market value. The final loan amount sanctioned to an individual is a derivative of other risk factors involved. As per the eligibility parameters like the past credit record, monthly income, repayment liability, existing credit, etc.

Financing under a loan against commercial property is usually big-ticket, making it suitable for several high-value business-related expenditures. As it does not come with any restriction to end-use, one can also utilise the funds for personal financing needs, such as funding higher education, child’s marriage, overseas travels, and the likes. Alternatively, one always has an option to go for a loan against residential property to fund personal financing needs.

How Does a Commercial Property Loan Work?

A commercial property loan works just like any other loan against a property option. To avail funding, the aspiring borrower must meet the minimum eligibility requirements laid down by the lender. Once met, he/she can apply for the advance with the necessary documents.

The financial institution would then proceed to confirm the eligibility and assess other risk factors associated with the borrower. Based on that, they would decide whether to lend the funds or not. If agreed, the lender proceeds to verify property ownership and completes it with an on-site verification to confirm the market value of the commercial property. Based on that, a loan amount along with a suitable tenure and the interest rate thereon is sanctioned. The borrower needs to sign the sanction letter to confirm the agreement for the loan to be approve.

After the loan is disbursed, the borrower needs to start repayment in EMIs, which shall be payable until the tenure’s end. Complete repayment of the loan liability leads to the release of the asset from collateralisation and a NOC issue for reclaimed rights of the borrower. In case the borrower fails to repay the total loan liability, the lender reserves the right to recover the amount through a property auction.

Eligibility and Document Requirements for a Commercial Property Loan

As loan against commercial property is a secured advance and backed by asset collateralisation, eligibility parameters are not very strict. However, an individual needs to meet a handful of established criteria to be eligible for the advance. Some of the standard requirements laid down by financial institutions include – 

• Applicant’s age: Age is a primary criteria as it establishes the number of working years one has remaining, based on which the loan amount as well as tenure is decided. The standard age range to avail of a commercial property loan stands between 25 and 70 years.
• Occupation and income stability: Applicant’s occupation and income stability also play a crucial role in establishing his/her eligibility for the advance. While both self-employed and salaried individuals can avail the advance. The minimum annual and monthly income can vary for the two.
• Residential status: One must also be a residing Indian citizen to avail this financing option.

Further, although credit score is not a mandatory criterion for availing a loan against commercial property, it is ideal to see that your score stands not less than 750. A high credit score indicates that the credit history of the individual is not mare by any repayment defaults or delays. It also indicates a reliable creditworthiness of the borrower and financial discipline. That are crucial for managing a long-term, high-value financing like a commercial property loan. A high credit score thus improves one’s chances of securing the required advance. Or at least the approved advance at favourable terms.

Further, one also needs to fulfil the document requirement laid down by the selected lender to complete successful loan application processing. Usually, the documents required reflect the parameters established by the eligibility criteria. Thus, standard document requirement for a commercial property loan include – 

• Documents related to property ownership
• KYC documents establishing the individual’s identity, address, and age
• Income proof for at least the previous two financial years
• Proof of employment or business existence, whichever is applicable

Once you have met the eligibility and document requirements laid down by your selected lender, you can apply for a loan against commercial property. To improve your eligibility for the advance, you can adopt ways like documenting all income sources. Applying for a smaller loan value than your maximum eligibility. Adding a co-signor with a high credit score to your application, and the likes. Opt to send your loan application online for a fast-tracked and hassle-free application processing.