Equipment loans are the financing you need for any machinery, vehicle, or equipment needed for running the business efficiently. It is the monetary assistance that allows business owners to pay for pieces of equipment purchased over a predetermined duration. Equipment loans have always been a favourable choice for small businessmen often.
It is because the equipment doesn’t come cheap and funding for it might mean having to part with a significant fraction of revenue generated by the company. When such a situation arises, business loans come to the rescue. However, getting an equipment loan is not a piece of cake, even though there are several companies offering equipment loan services in India.
Unlike back in the day, when you could easily approach a bank or the equipment lender directly and apply for a business loan. With new businesses coming up every day, competing for business loans is a common issue nowadays, especially for small businessmen. The challenges faced include cumbersome paperwork, low approval rates, and a lengthy application procedure.
The amount you can avail through an equipment loan varies with the type of business and equipment involved. The repayment period for the loan depends on the time estimated by the lender for the equipment to retain its value. Also, the interest rate you get is different for different vendors. It is generally decided on key factors like credit score, revenue generated by the company, tax returns, etc.
While traditional banks may require collateral but usually, the collateral for an equipment loan is the equipment itself. Hence, equipment loans are self-collateralized; i.e., you can get a loan without paying money upfront. You become the owner of the equipment once you have fully paid off the loan. However, if you default on the loan payments, the lender may seize the equipment. Since this reduces the risk involved on the lender’s part, they are willing to negotiate while granting a machinery loan.
Why do we need Equipment Loans?
Irrespective of the size of the company, every business needs equipment loans now and then to buy new equipment or repair, replace, or upgrade old ones without compromising on the cash flow. It is also crucial for the smooth functioning of the business. The right equipment can not only help expand your business but also increase work efficiency and facilitate employee loyalty. It can also bring down the cost per unit, thus increasing profits.
How to get Machinery Loan?
Equipment loans are comparatively easier to secure than traditional loans. However, lenders will need to evaluate the business’s financial health and your creditworthiness based on some criteria. Certain requirements are required to be fulfilled before you can apply for a machinery loan:
Good Business Vintage: an existing business is always preferred over start-ups because it adds much-needed credibility to the company. The older the business, the more stability it reflects. Hence, the lesser risks it projects to your lenders.
Good to Excellent Credit Score: credit score plays a significant role in securing loans. You are more likely to obtain an equipment loan with a good personal credit score despite working at a less reputed company than if you have a bad credit score but work for a much more coveted company. Moreover, a good credit score puts you in a better position to negotiate for cheaper interest rates. Therefore, personal as well as a business credit score can often be a game-changer.
Agenda for the Loan: you must have a solid plan in place on how you want to spend the loan for the growth of the business. A thorough and detailed understanding of the purchase plan, along with the anticipated consequences, will help you grab the attention of prospective loan lenders.
Documents required for Machinery Loans
Furnishing the correct documents to the lender will find you a place in his good books and might even help you seal the deal. It also saves you a lot of time trying to convince the lender where you can easily provide proof for all your claims. The essentials for those above are as follows:
- Business financial statements minimum up to 2 years
- ITR statements
- ID proof – PAN and Aadhar Card
- Business license
But if we look at the bigger picture here, the rise in business vendors has also ushered in the advent of various other lending options, which if exploited efficiently, can be a boon to small businessmen. Instead of spending long hours at traditional banks in vain, borrowers can now turn to non-conventional lenders, such as NBFCs. They offer flexible equipment loans at lower interest rates and have higher approval ratings.