Businesses need large capital reserves for smooth operations – to purchase assets, meet working capital needs, manage cash flow, or expand the business. However, limited cash reserves or longer sales cycles can put a strain on your finances. And you end up looking for an alternative source of finances.
Here, if you own a commercial property, you have the opportunity to monetise the rents received on this property through lease rental discounting. Lease Rental Discounting is a tool to secure a term loan using the rental receipts as collateral. It is a lucrative option for small businesses to fund their capital investments or fulfil their working capital requirements.
How does lease rental discounting work?
Lease rental discounting is the consideration between the borrower who owns the property, the tenant who leases the property, and the financial institution. The owner uses the monthly rent receipts drawn from the lease as collateral for the loan. And the lender evaluates the long-term cash flow of the borrower and sanctions an LRD-based loan for the amount.
In other words, the lender “purchases” the rent receivables from the borrower and sanctions a loan amount after deducting the time value of money. The loan is payable to the lender by the rents promised – which the tenants directly deposit with the lender and not the borrower/lessor.
Lease rental discounting is a profitable financial alternative to explore if you want to quickly meet your business’s short-term financial needs.
Features of lease rental discounting
1. Agreement among three parties
Under lease rental discounting, the loan is not secured by the property but by the expected rental cash flow. The lender agrees to offer a discounted amount of the rent receivables as a loan to the borrower. And the tenant signs the rental agreement with the lender, agreeing to make the rental payments directly to them once the deal is in force.
This agreement streamlines the loan process as the rent is transferred to the lender directly as EMIs against the loan repayment.
2. Competitive interest rates
In most cases, the lender extends lease rental discounting on rented commercial or industrial properties. Since the returns from these sources are quite high, businesses can secure affordable loans at competitive interest rates.
3. Dual use of property
Lease rental discounting enables owners to use their property more effectively. Business owners have the opportunity to secure a loan against the property and, at the same time, leverage the rental cash flow to acquire another loan – thus, enhancing their liquidity.
4. Balanced cash-flow
Most lenders offer extended loan tenures to cover the higher loan amount. The regular rental income repays the loan in the form of EMIs, and the business owner does not have to worry about the repayment. This ensures a balanced cash flow for the business.
Purpose of lease rental discounting
Since LRD is a multipurpose loan, the funds can be used for any productive purpose.
- Business Expansion
A long against rent receivables is an ideal option when the lessor is looking to lower their personal expenditure when investing in more properties. Property owners can use the funds to grow their business of any kind. This gives them the advantage of meeting their business needs without straining their finances.
- Repayment of loans
Property owners can easily leverage these funds to refinance or repay their existing debts. With longer repayment tenure and attractive interest rates, lease rental discounting becomes an affordable choice to repay high-interest loans easily.
- Purchase new property
Lease rental discounting is an attractive financial option for borrowers whose primary income source is rental payments. So, to enhance their portfolio and generate additional sources of rental income, the lessor can purchase a new property with these funds.
Moreover, with an LRD-based loan, the existing property becomes a source of loan repayment as the lessor need not pay EMIs from his pocket. This is an intelligent way to expand a rental business.
Pre-requisites to lease rental discounting
1. Corporate tenants
As lenders use the future cash flow estimates to sanction a loan today, lease rental discounting is only valuable where the cash flow is certain. As a result, lenders approve a loan against rent receivables where the tenants are financially sound to meet the rental obligations.
2. Longer lease term
Lessors can avail of lease rental discounting against a property with a longer lease tenure. Since LRD is a high-financing option with longer repayment tenure, lenders don’t offer short-term discounting on lease rentals.
Over to you
Lease rental discounting helps you make the most of your rental income and is an efficient tool for companies to navigate any financial requirement. Get in touch with experts at Tata Capital for further guidance on loan tenure, interest rates, and more!