Comparing Loan Against Property and Cash Credit

Introduction

In India’s thriving entrepreneurial ecosystem, MSMEs (Micro, Small, and Medium Enterprises) play a crucial role in employment, manufacturing, and GDP contribution. However, one of their biggest challenges remains — accessing smart and timely finance.

Two popular financing tools that MSMEs frequently consider are Loan Against Property (LAP) and Cash Credit (CC). Both are viable, but their effectiveness depends on your business goals, repayment capacity, and available assets.

In this blog, we offer a clear breakdown of Loan Against Property vs Cash Credit — to help you make an informed decision that suits your MSME’s specific needs.

Understanding Loan Against Property (LAP)

Loan Against Property is a secured term loan, where you pledge your commercial, residential, or industrial property to borrow a lump-sum amount from a lender.

Key Highlights:

• Collateral: Owned property (must have a clear title)

• Loan Amount: Typically 50-70% of property’s market value

• Tenure: 5 to 15 years

• Interest Rate: Generally ranges from 8.5% to 13.5%

• Usage: Long-term capital needs — equipment, real estate, plant expansion, or machinery

When Is LAP Useful?

If your business requires high-value funding for long-term investments, and you own an unencumbered property, LAP offers a cost-effective solution with longer repayment flexibility.

Understanding Cash Credit (CC)

Cash Credit is a revolving short-term credit facility provided against your business’s working capital assets like stock, raw materials, or receivables. You are assigned a credit limit, and interest is only charged on the utilized amount.

Key Highlights:

• Collateral: Business inventory, receivables, or fixed deposits

• Limit: Based on the “drawing power” derived from audited financials

• Tenure: One year, renewable

• Interest Rate: Typically between 11% and 16%

• Usage: Salaries, raw materials, vendor payments, short-term gaps in cash flow

When Is CC Useful?

Cash Credit is ideal for MSMEs with seasonal cash flow cycles or those needing frequent liquidity for daily operations.

Loan Against Property vs Cash Credit: Key Comparison

Feature	Loan Against Property (LAP)	Cash Credit (CC)
Loan Type	Term Loan	Revolving Credit Line
Collateral	Immovable property	Inventory, receivables
Loan Amount	High (₹5 lakh – ₹25 crore)	Moderate, based on business turnover
Interest Charged On	Full loan amount	Amount utilized
Tenure	5 to 15 years	1 year (renewable)
Repayment Structure	Monthly EMIs	Flexible usage and repayment
Processing Time	Slower, document-heavy	Quicker (if financials are ready)
Usage	Capital investments	Working capital, day-to-day needs
Risk of Default	Loss of property	Restricted future credit lines

Advantages and Disadvantages of LAP and CC

Loan Against Property – Pros:

• Lower interest rate due to high-value collateral

• Long repayment periods reduce EMI burden

• Large fund availability for long-term goals

• Multi-purpose use: expansion, infrastructure, acquisitions

Loan Against Property – Cons:

• Property must be mortgage-free

• High documentation and slower disbursal

• Risk of losing the property if EMI defaults occur

Cash Credit – Pros:

• High flexibility in usage and repayment

• Interest is charged only on the amount used

• Suitable for short-term or seasonal working capital

• No fixed EMI schedule

Cash Credit – Cons:

• Higher interest rates than LAP

• Limit is tied to audited financials and inventory valuation

• Annual renewal can involve compliance and financial scrutiny

• Not suited for capital expenditures or long-term investments

Loan Against Property vs Cash Credit: Which Is Smarter for MSMEs?

The right choice between Loan Against Property vs Cash Credit depends on three key factors: purpose, asset availability, and financial planning.

Choose LAP If:

• You own clear-title property

• You need a large capital infusion

• Your business is expanding or upgrading infrastructure

• You’re comfortable with monthly EMI payments

Choose CC If:

• Your business faces seasonal cash flow gaps

• You want the flexibility to borrow as needed

• You have regular inflow of receivables or saleable inventory

• You prefer not to mortgage a fixed asset

Real-Life Use Case Scenarios

Case 1: Manufacturing MSME Expanding to a New Plant

• Needs ₹2 crore to purchase land and machinery

• Has clear-title commercial property

• Opts for Loan Against Property with a 10-year term

Case 2: Seasonal FMCG Trader in Tier-2 City

• Needs ₹50 lakh to stock goods before festive season

• Has strong inventory and sales record

• Chooses Cash Credit to manage short-term liquidity

Conclusion

Both Loan Against Property and Cash Credit are powerful financing tools. However, choosing the smarter one depends on how your MSME earns, spends, and grows. LAP provides scale and stability for expansion, while CC delivers agility and flexibility for everyday operations.

Whichever you choose, ensure you:

• Compare lender offers

• Understand the terms clearly

• Align financing with business goals

• Maintain strong financial discipline

When used wisely, both LAP and CC can be growth enablers — not just sources of credit.