Running a business, whether it’s aiming for expansion, buying essential machinery, or simply needing working capital during lean months, always circles back to one critical question: How should I fund it?
Many business owners find themselves stuck between two major options: taking a Loan Against Property (LAP) or opting for an Unsecured Business Loan.
While both options put cash in your hand, the differences in how they work, the inherent risk, and their impact on your long-term business finance are profound.
Let’s explore both in simple but deeply detailed terms to help you choose the right business funding option.
Understanding Loan Against Property (LAP): The Power of Security
A Loan Against Property is a classic secured business loan.
It means you use an existing asset (a residential flat, commercial shop, or even an industrial unit) as collateral.
Because the lender has your property as security, they drastically reduce their risk.
This allows them to offer you some major advantages: lower interest rates and far longer repayment periods.
The loan amount you get is typically around 60% to 70% of the property’s market value.
Example:
Imagine you own a shop in Vadodara worth ₹1 crore. You need ₹50 lakh to expand your business. By applying for a LAP loan, you could easily secure ₹60–₹70 lakh depending on your profile and property documents.
You continue to use and own the property; the ownership papers are simply held by the bank as security until the loan is fully repaid.
Understanding Unsecured Business Loan: Focus on Performance
An Unsecured Business Loan requires no property or asset as security.
The bank relies entirely on the performance of your business, your credit history (CIBIL score), bank transactions, and income stability.
Since the lender carries significantly more risk without collateral, they must charge a higher interest rate and require a shorter tenure for repayment compared to a LAP.
Example:
Let’s say your small manufacturing unit needs an urgent ₹10 lakh to buy raw materials for a sudden, large order. You don’t want to mortgage your assets.
An unsecured business loan can deliver these funds in as little as 2–3 days, but the interest rate might be higher (around 15–20%), and you’ll typically need to repay it within 3–5 years.
Key Differences Between LAP and Unsecured Business Loan
Collateral Requirement
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Loan Against Property: Requires property collateral, making your property the security.
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Unsecured Business Loan: Does not require any collateral, offering convenience but at a higher cost.
Interest Rate
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LAP Interest Rates: Usually range from 8.5% to 12%.
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Unsecured Business Loans: Range from 13% to 22%.
The difference exists because secured loans significantly reduce the lender’s risk profile.
Loan Tenure
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LAP: Offers repayment flexibility up to 15 years.
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Unsecured Business Loans: Have shorter tenures of 1 to 5 years.
This means LAP gives you much smaller, more manageable EMIs.
Loan Amount
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LAP: The amount can be quite high (from ₹10 lakh to ₹5 crore or more), directly tied to your property’s value.
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Unsecured Business Loans: Generally cap at ₹50 lakh or less, based purely on your credit and business profile.
Interest Rate and EMI Example: The Real Cost of Funding
Let’s put the differences in perspective with a standard loan amount: ₹50 lakh.
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Scenario A: Loan Against Property
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Rate: 9%
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Tenure: 15 years
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Your EMI will be around ₹50,700 per month.
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Scenario B: Unsecured Business Loan
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Rate: 17%
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Tenure: 5 years
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Your EMI jumps to ₹1,24,000 per month.
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This example clearly shows that, while requiring property security, secured loans are significantly cheaper and provide vital relief to your business cash flow with smaller EMIs.
Risk Factors Involved: Managing Your Business Risk
Loan Against Property Risk
The major risk here is the loss of your property if you default.
The lender has the legal right to take possession and sell the asset to recover their dues.
Therefore, you must be absolutely confident in your long-term repayment ability.
Unsecured Business Loan Risk
While there is no risk to your physical property, defaulting will severely damage your CIBIL score and future loan eligibility.
It may make securing any future SME loans or credit lines virtually impossible.
Processing Time and Documentation
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Loan Against Property: Involves property valuation, legal checks, and extensive document verification, so it typically takes 7 to 15 working days.
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Unsecured Business Loans: Can be processed much faster, often within 48 to 72 hours, since no collateral valuation is involved.
Need is Urgent? For immediate needs like paying salaries or managing inventory, an unsecured business loan saves time.
For stable, long-term capital (e.g., setting up a new branch), LAP makes more financial sense.
Who Should Choose LAP? (Long-Term Growth)
Choose Loan Against Property if:
- You own property with clear documents.
- You need a large loan amount (above ₹30 lakh).
- You absolutely prefer lower EMIs and a longer repayment tenure.
- You plan to use the funds for stable, long-term business growth.
Example:
A wholesale trader wants to buy an ₹80 lakh new warehouse. Instead of taking multiple small loans, he mortgages his commercial shop worth ₹1.2 crore and gets a LAP of ₹70 lakh at a low interest rate. His EMI is manageable, and he continues using his shop.
Who Should Choose Unsecured Business Loan? (Quick Cash Flow)
Choose Unsecured Business Loan if:
- You are unwilling to mortgage your property.
- You need quick access to cash.
- Your loan requirement is relatively smaller (₹10–₹30 lakh).
- You want to cover short-term business expenses.
Example:
A café owner wants ₹12 lakh for new interiors before the busy festive season. He applies for an unsecured business loan and gets the funds in 2 days. Though the interest is higher, he repays it quickly in 3 years without risking his shop.
| Loan Type | Pros (Benefits) | Cons (Drawbacks) |
| Loan Against Property | Lower interest and EMIs, high loan amount, long repayment flexibility, ownership retained. | Property risk if repayment fails, longer approval process, legal and valuation charges. |
| Unsecured Business Loan | No property risk, quick disbursal, minimal documentation. | Higher interest and EMIs, limited loan amount, short tenure can pressure cash flow. |
Final Thoughts: Choosing What’s Right for You
The right choice hinges entirely on your business’s current situation and your personal comfort level with risk.
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If you seek long-term stability, large capital, and affordability, and can provide property as security, go for the Loan Against Property. It is the most cost-effective path.
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If you need instant funds without pledging assets, the Unsecured Business Loan is better, though you must be ready for the higher cost.
Always compare offers from multiple lenders to secure the best deal that aligns with your repayment capacity.
Contact Adiguru Financial Services for expert guidance and transparent advice before applying for your next business loan.
📞 Call us now: +91 886 652 9124 | +91 989 840 9871
📧 Email: info@adigurufinancialservices@gmail.com
🌐 Website: www.adigurufinancialservices.com
Based in Vadodara, we serve clients across Gujarat. Let’s make your dream a reality, together.
FAQs
What is the key difference between a Loan Against Property and an Unsecured Business Loan?
LAP is a secured loan backed by property, while an unsecured loan is based only on your credit and income profile.
Which loan gives lower interest rates?
Loan Against Property offers lower rates due to the property security provided.
Can I use LAP for both business and personal needs?
Yes, LAP is flexible and can be used for business expansion, education, or even debt consolidation.
What happens if I fail to repay LAP?
The lender can take possession of the property after due legal notice.
Do unsecured business loans require a high CIBIL score?
Yes, lenders usually prefer a score above 700 for unsecured loans due to the higher risk.
Which one is faster to get approved?
Unsecured Business Loans get approved faster as they need no property verification.
Can I prepay my LAP or business loan?
Yes, most lenders allow prepayment after a certain lock-in period, usually with minimal charges.
Which one is better for long-term projects?
LAP is more suitable because of its longer tenure and lower EMI.
Can I take LAP on jointly owned property?
Yes, but all co-owners must be co-applicants in the loan application.
How does Adiguru Financial Services help in LAP or Business Loan applications?
Adiguru provides end-to-end assistance including eligibility checks, documentation, and comparison of the best offers from top banks and NBFCs.
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