Running a business requires significant investments in equipment and machinery. While some business owners can afford to purchase large equipment outright, many look to financing options to acquire the machinery they need while conserving capital. If you're considering purchasing new equipment for your business, here are five compelling reasons to explore machinery loans.
1. Preserve Cash Flow
One of the biggest appeals of a machinery loan for business is that it allows you to preserve capital. Rather than tie up large sums of cash to buy equipment, you can finance the purchase and pay it back over time. This frees up your working capital for other investments, expenses and opportunities.
Spreading payments out over a loan term also helps match the cost of new equipment to its useful lifespan. Rather than taking a huge cash crunch upfront, machinery loan payments can be timed to match the value you receive from the equipment over the years you use it. This makes equipment costs more affordable.
2. Take Advantage of Low Interest Rates
Current interest rates on machinery loans remain near all-time lows. Business equipment financing, while rates are low, allows you to lock in low monthly payments. This helps keep equipment costs affordable over the loan repayment period.
Low interest rates also allow you to potentially purchase more or higher-quality equipment than you could afford with an all-cash purchase. As long as the boost in productivity and profits justifies the loan payments, borrowing at low interest can be very beneficial.
3. Preserve Lines of Credit
Using loans for businesses like lines of credit to purchase equipment can destroy your available credit. Since lines of credit are usually short-term financing, you may have to repay the balance quickly or risk losing access to the funds.
Machinery loans keep lines of credit open for true short-term needs. With a machinery loan for business, you won't usually tie up a revolving credit source. This preserves funding flexibility should an urgent need for cash arise.
4. Improve Cash Flow
Upgrading old, inefficient equipment with newer machinery can actually improve your cash flow. Newer equipment consumes less energy, requires fewer repairs, and lets you operate with less labour. All these benefits can reduce operating costs.
A machinery loan converts the large upfront cost of new equipment into manageable monthly payments. However, you should choose loan terms that allow the savings from reduced operating expenses to exceed the monthly loan payments. This creates positive monthly cash flow from the equipment upgrade.
5. Access Larger Loan Amounts
Most financial institutions will loan higher amounts for equipment purchases than they would for lines of credit or standard small business loans. For significant equipment upgrades or large-scale expansions, a machinery loan for business provides the level of financing you need.
The specialised collateral of financed equipment also allows loan providers to offer higher loan-to-value amounts. While general-purpose business loans may cap out at ₹50,000 to a few lakhs, specialised equipment loan providers may finance over a crore for major machinery purchases.
How to Secure a Machinery Loan
If you've decided that acquiring new equipment through a machinery loan for business makes sense, here are some tips for securing business equipment financing:
- Check your credit: Loan providers will check your business and personal credit, so review your scores with the major bureaus first. Take steps to improve any issues and pay down debts before applying.
- Compare multiple lenders: Compare terms, rates and fees from banks, Non-banking Financial Companies (NBFCs), credit unions, equipment dealers and online lenders. Consider financing from the equipment manufacturer as well because they have tie-ups with financial institutions and may offer better deals.
- Come prepared with financial records: Have 3 years of business tax returns, current profit/loss statement and balance sheet ready. Financial institutions need to see historical finances and current ability to repay loans. However, startups and new businesses may also apply, but additional collateral may be needed.
- Be ready to put up collateral: Hard assets like equipment, vehicles or real estate may be required as security for the loan. The more collateral you can put up, the better your chances for approval.
- Consider your timeline: The equipment purchase process takes time. To avoid delays, start exploring business equipment financing options 1-2 months before you need funds.
- Bring expertise: Engage accountants or equipment finance experts to package your loan request professionally. Their expertise can improve your success rates.
Critical Equipment to Finance
Nearly any equipment used for business purposes can be financed with machinery loans. Some common examples include:
- Heavy equipment: Bulldozers, excavators, cranes, dump trucks and other construction equipment.
- Farm machinery: Tractors, plows, harvesters and other machines for working the land.
- Production equipment: Assembly lines, CNC machines, metal fabrication equipment and machine tools.
- Medical equipment: Imaging machines, dental equipment, Lasik surgical devices and other high-tech healthcare equipment.
- Transportation: Delivery vehicles, semi trucks, fleet vehicles and trailers.
- Technology: Servers, computers, networking gear, point-of-sale systems and phone systems.
- Food service equipment: Ovens, refrigerators, freezers, mixers and display cases.
The specific machinery loan programs available vary widely between financial institutions. Connect with loan providers familiar with business equipment financing in your particular industry for the best terms.
Conclusion
Updating old equipment or expanding operations with new machinery often requires significant capital investment. While some businesses can purchase equipment outright, machinery loans offer compelling advantages that make business equipment financing an attractive option for many owners.
Taking advantage of low interest rates, improving cash flow, preserving working capital, and increasing purchasing power are just some of the reasons a machinery loan may make sense for your business. But, do your homework regarding business equipment financing options before committing to major equipment purchases.
