What is rental discounting? Can I discount my rent receivables and borrow money
The newerneeds for finance have led to the improvisation of the loan systems within the banks and among these concepts there also is the concept of Rental Discounting or Lease Rental Discounting (LRD). In simplified terms, the lease rental discounting is a loan that is offered to the borrower against the rental receipts derived from one or several lease contracts with corporate tenants. This form of loan is givento the lesser based on the discounted value of rentals and the underlying property value.
Yes, it may come as a surprise but you can discount your rent receivables and borrow money and most of all you would not even have to worry about the repayment of such a loan, as the setting is such that the accountability of the same lies on the shoulders of the tenant of the property.In short, lease rental discounting allows the owner of the property to use the future rental inflows to fund the present need of cash. To explainthe concept clearly, we understand that under lease rental discounting, the rent that is collected over a stipulated time is considered the fixed income of the borrower. The agreement is betweenthe borrower and the lender, according to which the major termof repayment of loan is the rent which is directly deposited with the lender and not with the borrower. Hence the borrower is sanctioned a loan based uponthe rent to be collected over the period of lease.
Features of Lease Rental Discounting
• Any salaried person, professional or a self-employed person can venture into this type of loan.
• One of the major advantages that this loan type offers is high loan amounts that can be borrowed.
• As for the tenure, this loan can be taken for long terms also, extending upto a period of 10 years, which helps your future cash flows to fund your current cash requirements.
• The amount that can be raised through such a loan type can even be as high as 65% of the market value of the property, butthe same largely depends upon the bank you choose to raise it from.
• The amount that can be raised from LRD ranges from 15 lacs to 10 crores.
• Finally, in case of failure of repayment of such loan, the property is kept as collateral against the loan with the lending institution and is confiscated until theloan is fully paid.
When it comes to raising loan against property, lease rental discounting seems to be better plan. There are numerous advantages that are offered to the borrower, in case of this loan type and therefore is much more recommended form of raising money.
Advantages of raising money through LRD
• The repayment of the loan is not done by the borrower rather it is the rent that comes from the tenant of the property, that is directly submitted into the bank directly that takes care of it. The direct payment into the bank, in the account of the lender, makes the concept less hassle free for the borrower.
• Loan is procured easily and in a fast manner.
• Easy documentation for procuring the loan.
• Apparently the borrower of the loan is free from the burden of credit, and the responsibility lies on the shoulders of the tenant of the property.
• The money that is received from such a loan can be used against multiple purposes, of which investment can also be a means to increase the income of the borrower. The same money can also be used towards any other purpose and therefore is highly accessible.
• One of the major advantages of LRD is that the loan raised from such a setup is charged a lower interest rate when compared with any other unsecured loans owing to the determination of the loan amount depending upon the rent to be collected in the lease period.
Though the above listed features and advantages of the concept of LRD makes it seem extremely alluring, there are certain disadvantages it suffers when compared with the loan against property. For one, incase of the LRD the loan against property is not high as it could have been in case of a loan against property and a primary requisite that during the tenure of loan repayment, the borrower cannot sell the property.
Once the stated features, advantages and disadvantages of LRD are understood, the borrower can chose to make the right decision based upon the same and his requirements of cash as to whether to discount the rent receivables or to take a loan against property.