Understanding the Meaning, Benefits, and Eligibility of Lease Rental Discounting

In the dynamic world of finance, Lease Rental Discounting (LRD) has emerged as a powerful financial tool, enabling property owners and businesses to unlock the value of their assets. 

With commercial space leasing in India soaring by 41% to 66.7 million sq. ft. in the first three quarters of 2024, driven by growing demand from GCCs and Indian corporates, the relevance of LRD is more pronounced than ever.

Lease rental discounting (LRD) is a unique financing strategy that ensures steady cash flow in a competitive business environment. It primarily benefits commercial property owners facing long sales cycles and limited liquidity.

This article explains lease rental discounting, its benefits, and key eligibility criteria, demonstrating how it can transform your funding and financial planning approach.

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Understanding Lease Rental Discounting

Lease Rental Discounting (LRD) is a term loan that allows property owners to secure funds by leveraging the rental income generated from leased properties. Using future rent receivables as collateral, LRD provides immediate liquidity without requiring the property to be sold or further encumbered.

LRD funds can be used for diverse purposes, including business expansion and property renovation. It provides a strategic way for startup founders to access capital while retaining property ownership. 

The loan amount in LRD is primarily determined by the property's monthly rental income and the borrower’s repayment capacity. This makes LRD an attractive financing option, as it often provides higher loan amounts than traditional loans. 

Key Features of Lease Rental Discounting

• Loan Amount: Borrow up to 80% of the expected rent based on the property’s value and lender policies.
• Applicable Charges: Consider costs like processing fees, foreclosure charges, penal interest, and NOC/NDC charges.
• Flexible Repayment: Repayment terms align with lease durations, offering up to 15 years based on cash flow.
• Quick Disbursal: Streamlined processes ensure fast access to funds for urgent needs.
• Competitive Interest: Interest rates usually range between 8% and 14%, making LRD loans cost-effective.

If you’re looking for innovative credit structures like LRD, Recur Club—India’s largest debt marketplace, offers Recur scale designed for businesses seeking quick, flexible financing. 

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How Does Lease Rental Discounting Work?

Lease Rental Discounting (LRD) allows property owners to secure loans using rental income from their leased properties. Under a lease agreement, tenants pay a fixed monthly rent for a defined period. This arrangement helps property owners estimate the total rental income over the lease term.

Property owners can secure an LRD loan by using future rent receivables as collateral to access immediate funds. To determine the loan amount, lenders evaluate the property’s rental income, stability, and value. The approved loan is typically a percentage of the total expected rental income based on the lender’s policies and the property’s valuation.

In most cases, the tenant’s monthly rental payments are routed directly to the lender, ensuring seamless loan repayment. By converting rental income into immediate liquidity, LRD provides a reliable financing option without requiring the sale or additional encumbrance of the property.

Also Read: Understanding Different Types of Startup Funding

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Pros and Cons of Lease Rental Discounting

The following highlights the benefits of LRD loans:

Pros:

1. Immediate Liquidity: Access a lump sum based on rental income without selling or mortgaging the property.
2. High-Value Financing: Loan amounts depend on property value and rental income, supporting significant investments like business expansion or renovations.
3. Tax Benefits: Interest paid is deductible under Section 24(b) of the Income Tax Act, reducing taxable income.
4. Flexible Fund Use: Use funds for business growth, debt consolidation, or personal expenses like education and home improvements.
5. Retention of Ownership: Maintain complete property control while leveraging rental income, avoiding equity dilution.

Cons:

1. Rental Income Dependency: Loan viability depends on consistent rental payments; tenant defaults can disrupt repayment.
2. Prepayment Penalties: Some lenders charge fees for early repayment, increasing borrowing costs.
3. Default Risk: Tenant issues or vacancies can hinder rental income, risking loan repayment.
4. Property Valuation Risks: Fluctuating property values may impact loan terms unfavorably.
5. Loan-to-Value Risk: High borrowing can imbalance the loan-to-value ratio, increasing risk during market downturns.

Also Read: Loan-to-Value Ratio: Easy Calculation Guide with Examples and Tips

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Eligibility Criteria for Lease Rental Discounting (LRD)

Below are the eligibility criteria for availing of LRD loans:

• Age and Residency: Resident Indian, 25+ years old (18+ if property owner). Maximum age at loan maturity: 85 years or higher with a co-applicant.
• Credit Score: Minimum 725; a higher score improves approval chances and loan terms.
• Property Location: Metro, urban, or semi-urban areas with strong rental demand.
• Tenant Type: Lenders prefer reliable tenants like public sector units or large companies.
• Lease Duration: At least five years; longer leases are more favorable.
• Property Condition: Must be well-maintained and structurally sound.
• Rental Income: Must meet or exceed the lender’s minimum threshold.

Are complex loan documentation requirements interfering with your financing journey? 

Recur Club, one of India’s largest debt marketplaces, offers quick, hassle-free loans from 125+ leading lenders, including Aditya Birla Capital, INCRED, and Ugro Capital. 

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How to Apply for an LRD Loan? 

Once you meet the eligibility criteria, follow these key steps to apply for an LRD loan.

1. Evaluate Eligibility: Ensure your property is legally owned, located in a metro, urban, or semi-urban area, and leased to reputable tenants with a valid lease agreement.
2. Prepare Documentation: Gather essential documents, including property ownership proof, lease agreements, tenant details, and financial statements.
3. Choose a Lender: Research lenders offering competitive terms for LRD loans and select one that meets your needs.
4. Submit Application: Complete the lender's application form and provide all required documentation for processing.
5. Approval and Disbursement: Upon approval, the lender assesses your property and lease agreement and disburses the loan, with rental income assigned for repayment.

If you’re a small business owner, consider the factors below before applying for an LRD loan. 

Considerations for Small Business Owners Applying for LRD Loans

1. Understand Loan Terms: Know the interest rates, repayment schedule, and fees upfront.
2. Plan Fund Usage: Define how the loan will support your business goals.
3. Prepare a Business Plan: Show clear goals and financial projections to lenders.
4. Compare Lenders: Evaluate terms and costs to find the best option.
5. Seek Expert Guidance: Work with a financial advisor to make informed decisions.
6. Document Requirements: Ensure all documents are complete and error-free to avoid delays in your LRD loan application.

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Comparing Lease Rental Discounting with Traditional Loans

The table below presents key differences between Lease Rental Discounting (LRD) and traditional loans:

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In Conclusion

Lease Rental Discounting (LRD) is a valuable financing option for small business owners who own a property that generates fixed rental income over time. 

With flexible repayment terms, competitive interest rates, and higher loan amounts, LRD efficiently addresses diverse financial needs. However, borrowers should carefully assess potential risks, including dependency on rental income and the possibility of default. 

A clear understanding of financing options and expert guidance is essential to make informed decisions and optimize outcomes. If you’re considering LRD as a financing option, Recur Club’s dedicated capital experts can assist you with the required knowledge and expertise. 

With several options designed for startups and SMEs in their growth phase, we help you secure the right funding to meet your business needs.

To learn more about Recur Club, click here!