Understanding Loans against Securities

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When you are running a business, one of your major worries is always going to be getting the right finance at the right time. Be it at the start of your entrepreneurial venture or the working capital cash crunch you face when you least expect it. SMEs are usually susceptible to such needs and on the other hand, banks are always looking to fulfill such dire needs.

Of late, both banks and non-banking financial institutions (NBFCs) float a lot of these easy to get loan products in the market to meet the demand arising from theses SMEs. While traditionally they did provide loans against assets, they now even provide loans against financial assets such as mutual funds, insurance, security bonds, ETFs and government securities.

At times when SMEs face a liquidity problem, getting loans gets a bit difficult. Specially, if it’s an urgent cash crunch issue and there is no time to arrange for collaterals and all the paperwork that follows. Loans against securities (LAS) are the ideal way to get the much-needed liquidity. With quick and uncomplicated application processes, this is the perfect go-to for SMEs.

What are loans against securities?

Under LAS, the loan is given to a customer against the pledge of securities. These securities can be any type of securities such as insurance policies, mutual funds, government securities, non-convertible debentures, NABARD bonds, Demat shares, UTI bonds or NSC/KVP. They can also differ from bank to bank. Loans against securities are usually taken for short durations, as securities are merely pledged and not out rightly sold. It works like an overdraft facility advanced to you from a bank or a financial institution. The value is determined on the basis of the securities that are being pledged and is usually 50-70% of the total value of the securities. Although lesser than what you get against loans on properties, this is quicker and less fussy to avail of.

How do they work?

The bank/financial institution opens a bank account for the pledger and deposits the money being loaned against the securities. It is on the pledger’s discretion on how and when to withdraw and use the money. The pledger only pays interest on the money withdrawn from the account based on the period of utilization.

Benefits of Loan against Securities

The best part about pledging your securities is that you don’t lose your benefits of being the shareholder and enjoy your rights of dividends and bonuses. Another perk is that you pay a lesser interest rate through loan against securities as compared to a personal loan. It’s a secured loan and there are usually no prepayment charges, although they may differ from bank to bank. Since it’s easy to get a loan against securities, it’s a great way of raising capital for SMEs when one is in a dire need.

Contributed by SMEcorner – India’s first online loan application platform.

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