Most businesses rely on machinery to boost production, boost productivity, and satisfy customers, but buying equipment outright is more than many business can afford, particularly small to medium-sized ones. This is where machinery loans are used. A machinery loan is a form of financing that enables companies to purchase new or used machinery without the burdensome initial costs.
What is a Machinery Loan?
A machinery loan is a type of specialized loan for businesses to buy or lease machinery or equipment necessary for their operations. It allows the business to obtain the required capital to acquire machinery without depleting the company's working capital or affecting its cash flow. The loan is secured by the machinery itself, so in the event of default in loan repayment by the borrower, the lender can take possession of the machinery.
Types of Machinery Loans in India
There are various machinery finance schemes in India, each suitable for specific purposes. The most popular ones are:
1. Term Loan for Machinery
Term loan is a very common kind of machinery loan. In this loan, the company takes a lump sum amount of money from a lending institution, which is utilized to buy machinery. The loan is paid back in equated monthly installments (EMIs) over a fixed time period, usually 1 to 5 years. This kind of loan works best for a company that wants to buy high-value machinery or equipment with long-term advantages.
2. Equipment Financing
Equipment financing is yet another equipment loan that enables a business to purchase machinery through borrowed funds. The lender finances according to the price of machinery, and machinery becomes collateral in support of the financing. The alternative is great for companies using machinery for small-duration projects and with a short financial requirement.
3. Hire Purchase
Under the hire purchase system, an enterprise can obtain machinery with an initial payment and pay the rest in installments over a predetermined period. When the repayment time elapses, the ownership of the machinery reverts to the enterprise. It is a preferable option for companies that require machinery urgently but cannot make a full payment upfront.
4. Leasing
Leasing is a versatile method in which companies can obtain equipment without actually owning it. The equipment is rented for a definite duration, and the company pays a monthly lease charge. Upon the expiry of the lease term, the company can either return the equipment or buy it at a reduced cost. Leasing can be a great choice for companies that require the newest equipment but do not want to burden themselves with long-term ownership.
Why Choose Machinery Loans in India?
There are quite a few reasons why one would choose to go for a machinery loan in India. Let us examine some of the most prominent advantages:
1. Access to Capital Without Tapping Resources
Buying machinery with cash can necessitate a considerable initial outlay, which might put pressure on a company's working capital. A machinery loan enables companies to acquire the necessary equipment without depleting working capital, and they can make use of the funds for other critical business processes.
2. Increase in Productivity
By purchasing new or improved machinery via a loan, companies can improve their productivity. New machinery is more efficient, long-lasting, and able to produce more, which eventually results in improved performance and increased profitability. The sooner the machinery is purchased, the earlier it can begin to help your company grow.
3. Flexible Repayment Options
Borrowers can get repayment plans with flexibility provided by lenders, depending on their financial position. According to the loan agreement, companies can avail a loan tenor that works well with the cash flow cycle so that business operations are not compromised and maintaining finances is possible.
4. Tax Benefits
The interest on a machinery loan is deductible as a business expense under Section 36(1)(iii) of the Income Tax Act, providing tax relief to businesses. Businesses can also claim depreciation on the machinery itself, further lowering taxable income.
5. Enhancing Creditworthiness
Paying off a machinery finance loan successfully can enhance the creditworthiness of a business. A good credit history can assist in securing favorable terms for future loans, enabling businesses to grow and develop with less financial strain.
Things to Keep in Mind Before Applying for a Machinery Loan
Although machinery loans have a number of advantages, there are certain things to keep in mind before applying for one:
1. Loan Eligibility
Lenders usually have certain eligibility criteria for machinery loans, such as the turnover, profitability, and credit rating of the business. It's essential to ensure that your business qualifies with the lender before applying.
2. Interest Rates and Fees
Interest rates for machinery loans can vary depending on the lender, the loan amount, and the business’s credit profile. It’s essential to compare interest rates and any additional processing fees charged by different lenders to ensure you’re getting the best deal.
3. Loan Repayment Terms
Understanding the repayment terms is crucial. The repayment period, interest rates, and frequency of payments (monthly, quarterly, etc.) should align with your business’s cash flow. It’s important to ensure that the loan won’t put a strain on your finances.
4. Down Payment
Some lenders might insist on a down payment or margin money. The amount of this down payment can be anything from the lender and the machine being bought. Make sure you are ready to pay this amount before you apply for the loan.
Conclusion
A machinery loan in India can be a life-saver for companies that need to buy important equipment without burning a hole in their pockets. Whether it is a hire purchase scheme or a machinery finance option, companies have a number of options available to them when it comes to financing their machinery requirements. With the right loan option and lender, companies can improve their operations, boost productivity, and grow more efficiently in a more competitive marketplace.