Understanding Machinery Loans and Their Benefits for MSMEs

Financial institutions in India offer loans to businesses that need machinery for production. These loans enable MSMEs to grow and prosper by acquiring essential machines at a low cost.

Globally, production machinery is becoming increasingly automated due to technological advancements. Fully automated machines are expensive, but they are essential for improving production and quality. To facilitate the purchase of such equipment, various financing options are available, including government loans, business loans, and machinery loan for MSMEs.

What are Machinery Loans?

Business loans are provided to companies looking to buy new equipment or machinery. Lending institutions offer both secured and unsecured options, depending on the borrower's needs.

Modern machinery has become increasingly automated, incorporating IoT (Internet of Things) and AI technology to reduce human involvement during operation. These sophisticated machines are costly. While large corporations can afford such equipment, smaller businesses often rely on manual labor and traditional machinery.

Machinery loans are introduced to bridge this gap.

Micro and Small Enterprises can finance their machinery purchases to improve production efficiency and compete with larger companies. MSMEs can obtain machinery loans from banks, non-banking financial companies (NBFCs), digital lending platforms, or other financial institutions.

Different Types of Machinery Loans

Each machine has a specific function within different industries. Many loan products are tailored to meet the needs of machines that are in high demand in India. These include:

• Construction equipment
• Medical equipment
• Processing equipment
• Electronics
• Appliances
• IT and office equipment
• Automobiles
• Aircraft
• Printing
• Plastic and packaging equipment

The Benefits of a Machinery Loan

The right machinery loan provides companies with multiple benefits beyond simply funding equipment. Some key advantages of borrowing from Indian financial institutions include:

1. Financing Large and Expensive Machinery
   Industries require high-quality machinery for production. Importing machinery is a common practice among Indian companies to enhance production. The total cost of purchasing such equipment is often overwhelming for small business owners. Machinery loans in India can finance up to 90% of total machine costs, allowing business owners to increase their order volume and revenue streams.
2. Maximum Loan Amount of Rs 25 Crore
   Machinery loans are available for amounts up to Rs 25 crore, as equipment can be expensive. Most banks require collateral when approving large loans.
3. Tax Deductions
   The interest on business loan is tax-deductible under the Income Tax Act. Businesses can use this deduction to reduce their tax liability.
4. Hypothecation
   Hypothecation is a common practice among lenders for providing equipment loans. The machinery purchased with the loan is used as collateral. Hypothecation enables large loans to be sanctioned without the need for additional collateral, giving businesses more financial flexibility.

Key Features of Machinery Loans

Here are some key features of machinery loans offered by financial institutions, including fintech firms, in India:

• Businesses can avail of loans up to Rs 25 crore from banks and NBFCs to finance their equipment needs.
• Financial institutions typically offer up to 90% financing on new equipment purchases and up to 75% on used machinery.
• In general, hypothecated equipment loans do not require additional collateral, as the equipment itself is used as security.
• Machinery loans can also be used for repairing and upgrading existing equipment.
• The repayment period ranges from 3 to 7 years, with interest rates typically between 15% and 20%.
• Several financial institutions provide online machinery loan calculators, allowing businesses to estimate interest payments and repayment periods.

Eligibility Requirements for Machinery Loans

The eligibility criteria for machinery loans in India vary between lending institutions. However, common requirements include:

• Age Requirement: The applicant must be between 21 and 65 years old.
• Documentation: When applying for a machinery loan, lenders typically require the following documents:

• Aadhaar or Voter ID card
• PAN card
• Three years' books of accounts from the date of application
• KYC documents for the company
• Tax returns for the past two years
• Bank statements for the last three years
• Details of machines previously purchased or quotations for machinery to be purchased in the future

Government Loans for Machinery Purchase

The Credit Linked Capital Subsidy Scheme (CLCSS) is a popular government loan initiative for purchasing machinery. This scheme offers upfront capital subsidies to small-scale industries, including khadi, coir, village, and tiny enterprises.

Conclusion

MSMEs can leverage machinery loans to increase their production capacity and expand their businesses. Securing funding for modern, automated equipment improves the efficiency and product quality of small and micro businesses, giving them a competitive edge over large corporations. With a variety of funding options, including government schemes and flexible loan conditions, MSMEs can invest in machinery without straining their finances.

In a rapidly evolving market, machinery loans not only meet the immediate needs of MSMEs but also position them for long-term success. These financing opportunities empower businesses to unlock their full potential and contribute to a thriving economy.