What is a Machinery Loan and How Does it Work?
Every business owner, small or online, offline or online, new or established, requires machinery, such as ranging from the basic ones (such as computers, printers, phones, desks and other furniture) to the large ones (such as trucks, cars, specialised machinery and other industrial equipment) daily. No business, whether small or big, can run smoothly without proper machinery to reduce the workload and increase productivity. Hence, machinery is a vital accessory to all sorts of business.
Machinery loans refer to loans which provide monetary assistance to purchase machinery without having to compromise a substantial amount of business funds. Moreover, a machinery loan also provides funds for repairing an existing piece of machinery or upgrading it to state-of-the-art technologies. A machinery loan increases the productivity of the business and expands the customer base as well, thereby increasing overall business profits. All types of business loans in India, including machinery loans, have seen an upsurge in demand in recent years.
Although the terms of a machinery loan vary with different loan lenders, you can usually finance almost 80 per cent of your inventory with a business loan. After you pay the amount in full, the equipment officially belongs to you. The best thing about machinery is that the machinery is the collateral for the loan. Hence, you do not need to pay for the loan upfront. However, there is a machinery loan without collateral avail in the market. This is a boon, especially for small business owners, MSMEs, and start-ups.
However, availing an equipment loan is not a layman’s job. With no proper knowledge and understanding, it may turn disastrous for your business.
The following are the steps to avail a machinery loan right away:
Maintain a good CIBIL Score
The most obvious criteria to obtain any kind of loan is to have a good business as well as personal CIBIL score. The closer the score is to 900, the lower are the risks involved in sanctioning a loan, as perceived by the loan lenders. However, credit history doesn’t improve overnight. But repaying the outstanding loans gradually and avoiding defaults to keep the record as clean as possible can help build up the score in time.
Moreover, good credit can increase the chances to secure a business loan involving huge capital at much cheaper rates than someone with a lower credit score.
Have an Agenda
Foresight is often associated with entrepreneurship. You should be thorough with the objectives, and long-term goals of your business and consequences should also be counter-measured in advance. Lenders will ask for a detailed insight into your business, and if they are impressed with your synopsis and specifics, your chances of securing a machinery loan will increase multiple folds.
Determine the Loan Amount
One must invest a good amount of time in coming up with exact figures required in terms of a machinery loan. This is because lending a sum more than you require will make you pay unnecessary interest cost for the extra funds and take you longer than your anticipated time to repay the debts. Lenders are in business for enough time to know their math well. The more realistic the figures are, the more competence you portray to the lenders.
Determine the Appropriate Lender
Gone are the days when the only institution to provide you with a business loan was the traditional bank. There are a variety of lenders available at your discretion in recent times. Bank loans are difficult to qualify and have low approval rates as well. Also, they do not cater to small capital loan needs. Non-Banking Financial Companies, NBFCs, are easier to qualify and have flexible loan terms. They provide loans in all ranges depending on the requirements; the catch being their slightly higher interest rates. Other lenders include micro and alternative lenders, online lenders, commercial lenders, and peer to peer, lenders, to name a few.
Prepare Required Documents
Cash flow statements, ID proof, business licenses, ITR statements, revenue records, sales statements, bank statements, etc. are the documents generally needed to seal a loan with your lender. Hence, keeping these documents ahead of time can be useful.
Securing an equipment loan takes time and might test your patience to the optimum level. Even a flawless business background cannot guarantee you a loan because a lot goes into convincing a lender. One wrong move can hijack your chances drastically. Therefore, work on your credit history and seek the aid of a financial advisor before availing a machinery loan.