Share’ the Loan Opportunity

by Unknown 03:25 0 comments

Shares are a good tool to raise capital against, quickly and efficiently. Here’s why you should explore this option if you’re looking for funding.

There are hardly any businesses today that have not borrowed a loan at some point of time. Indeed, almost all businesses begin operations with loans, while others borrow intermittently for their various needs.

However, stacking up several debts in the form of loans can become a tricky proposition – if you are unable to repay any of your loans or you start defaulting on payments, you can run up a bad credit score. Also, if you have mortgaged your home or office property to run your business, you are looking at a huge monthly pay-out in the form of EMIs.

Instead of availing of a bank loan at a high rate of interest or selling off an owned asset like property or gold to repay existing debts, it makes better sense to put existing securities to use. For this, business owners might consider a useful loan product: loan against shares.

Why take loan against securities?

You can get immediate liquidity for your shares by taking a loan against them. If you don’t want to take a loan, you can choose to take an overdraft facility against the shares; this option will also generate working capital for daily purposes.

Loans against securities necessarily employ the shares, stocks and mutual funds you own to benefit you with immediate liquidity for your business needs.

How does one avail of loans against shares?

Today, many banks and financial institutions are offering the option of availing loans against securities. This helps raise funding quickly and when most needed. Taking a loan against shares safeguards other valuable assets like gold and property, though the lending interest for loan against securities is higher.

The applicant pledges his or her loans to the bank or financial institution; these shares are the collateral against which the lending institution is offering the loan. The loan amount is calculated basis the value of the shares at current market rates.

Do these loans make fiscal sense?

Though the interest charged on them is higher, the current boom in the equity markets in India is making these loan products very valuable indeed. The value of the pledged securities is on a steady rise, thus the loan amount correspondingly goes up.

However, lending institutions offer only about 50 per cent of the total value of the shares as loan – some amount of the shares are kept as a buffer in case share prices plunge. Also, there can be no selling of these shares as long as they are pledged as security. Only when the loan is repaid can any transaction on the shares take place. Normally, it is better to take a loan against shares only if one is confident of repaying it quickly. If the loan is required for a longer time, then the person must consider other loan products like personal loans. Business owners are cautioned to try and draw an overdraft against their shares as the business will pay lower interest on them.