Case study – Make a wish, I want money to start a business!

LAP – Loan Against Property

There are several private investors who fund business projects. They broadly fall under three main categories – angel investors, venture capitalists and private equity funding. At an early stage of entrepreneurship venture, it’s best to approach an angel investor.

Query: Am working in an IT company as a senior associate. I’m interested in opening a restaurant. I already have prior experience in the hospitality industry but the problem is I do not have financial backup. I want to know:

1. Is there any way to raise capital?

2. Should I take a loan? If yes, what type of loan ?

If you are keen on starting your own business you could explore a few options mentioned below that will help you realise your dream.

a. Approach a private investor

There are several private investors who fund business projects. They broadly fall under three main categories – angel investors, venture capitalists and private equity funding. At an early stage of entrepreneurship venture, it’s best to approach an angel investor. It could be any individual with surplus funds – a retired professor, a finance banker or someone well established from the same hotel industry. In fact approaching someone from the same industry can be a big help as they could don the role of a mentor and provide valuable expertise for establishing your business.

At a later stage, when your company has started off and has a good business model in place you could try for a second round of funding from venture capitalists.

The third option is private equity. This is usually opted for high risk and high growth sectors. This comes at a much later stage of an establishment’s growth.

b. Loan against property

You could also obtain a Loan Against Property (LAP); but for that you will have to pledge your property. The loan amount you can avail depends on the value of the property. This can range anywhere between Rs 1 lakh to 3 crore.

Your loan tenure can be as long as 15 years with interest rate between 12-14 per cent. The only downside is that it comes with the risk of giving up your property in case you are unable to repay the loan amount.

c. Apply for a business loan

Banks do offer business loans specifically for such business plans. You can avail from Rs 5 lakh to Rs 35 lakh with interest rates ranging between 12 to 15 per cent. However, this figure varies from bank to bank. Also some banks ask for collateral security if the amount exceeds a certain limit.

If you have made any investments in the form of deposits, insurance policies, gold etc. you could opt for a loan, pledging these as collateral. But these investments should be in your name. Your loan amount will be sanctioned based on the value of these investments.

Other loan eligibility criteria include income, repayment capacity, loan repayment period etc. You are expected to repay the amount in a maximum period of five years but some banks offer you higher repayment period with wider choice. The repayment mode can be monthly, quarterly or half-yearly. Check with your bank to know more about it.