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Use of property loan security for the purpose of working capital

  • 09-Sep-2022
Tip1 - Use of property loan security for the purpose of working capital

Are you facing problems in getting additional credit or facing a liquidity problem for your MSME? How can you get credit? 


The easiest way to get credit is through a bank or any lender. You can get a secured loan but in shortage of collateral security, what you will do in that situation? We have a solution to this problem. We are going to tell you the entire description related to the information. 


If you are unaware of MSME, firstly let you know what MSME is, and its role. Majorly we are talking about the financial problem that MSMEs face. Especially in India, MSMEs come across financial challenges. In covid period or lockdown affected MSMEs the most so, to balance their cash flow they need credit facilities.  


If you are the one who is facing the same problems, then this article is highly relevant for you. 


MSMEs (Micro, Small, and Medium Enterprises) are introduced by the Government of India through the “Micro, Small and Medium Enterprises Development Act, 2006.” MSMEs become the backbone of the economy by generating employment, exports, and national output, they routinely face a shortage of affordable finance to meet their working capital demands for India. 


The MSMEs are classified into distinct categories as Micro, Small and Medium according to their investments and turnover. In the year 2020, The definition of MSME has been revised by the cabinet to motivate the sector to pop more investment without losing the benefits of MSME.  


The growth and sustainability of MSME contribute to the sustainable growth of the country. In this series, the Government of India tries to stabilize the growth of MSME by giving financial aid through various schemes for this sector. 

Instead of that MSMEs face enormous threats and challenges for survival and growth. The major challenge they face is financial issues or Liquidity Crunch. 


The problem of liquidity can be solved through loans and the expansion of your business, but it also depends upon credit availability. On the other hand, the unavailability of timely and appropriate finance is a major obstacle to the growth of MSMEs.  


If you seek a Loan for MSME, it involves complex documentation procedures, stringent laws, the necessity of collateral, inflexible repayment tenures, and a high rate of interest. Financial institutions have certain limits for MSMEs due to the small size of loans, higher cost of services, and the limited ability of MSMEs to provide security against required finance. 


Despite the fact that MSMEs cover a large share of economic activities, banks are reserved about lending capital to this sector. It is more difficult to avail yourself of a loan as working capital when the borrower has a shortage of collateral security. 


Let us understand the problem by taking a case as an example. 


Case study: - A borrower who is having a sale of Rs.50 Cr and running a loan against property with an existing bank of Rs.7 Cr. Whereas the borrower collateral security value is 10 Cr. At present, the borrower wants to avail of an additional credit facility for working capital purposes. But the borrower doesn’t have any other collateral security, other than the above-mentioned. 


Being a financial adviser, I would like to suggest that you follow this advice. 


Suggestion: - The loan against the property is a long-term liability. Normally, working capital bankers do not takeover loans against property, loans for working capital limit so it is very difficult to get an additional credit facility with the existing bank. 


Few banks can sanction loans up to 130% of total property value I.e., credit facility of 13 Cr on the property value of Rs.10 Cr only. The new facility will be a combination of a loan against property, an overdraft limit, and a letter of credit. 


The Entire facility will be at very reasonable prevailing interest rates. Letter of credit can be further utilized after discounting for payment of purchase bill, this will be cost-effective also.  


We can conclude that you do not need to worry about your shortage of collateral security. You can use property loan security for the purpose of working capital also. 


We are continuing with more tips in this series.  

Read also: MSME Financing Series -1 Export Bill Discounting

Author Bio

Name : Vikas Jain
Qualification : ca_practice 🎓
Company : Financeseva
Location : New Delhi, Delhi (DL), India

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