How can machinery loans for MSMEs help them grow their business?

For businesses, buying machinery for production is a necessity. And that is why, financial institutions in India offer machinery loans to MSMEs to enable them to buy the right machinery for their business.

With the advancement of technology, machinery used for production around the world is evolving, adding increased levels of automation. Getting a fully automated machine today is very expensive but it has become necessary to increase production and quality. Not surprisingly, there are several financing options available to buy equipment and machinery such as government loans for machinery purchase, business loans, and machinery loans for MSMEs.

What are machinery loans?

Machinery loans are business loans extended to firms who want to purchase new machinery/equipment for their business. This can be an unsecured or secured business loans depending on the lending institutions.

Machinery has become increasingly automated with modern equipment being armed with IoT (Internet of Things), and even AI in some cases, to decrease manual intervention while operating the machinery. These machines are costly as they accompany increased levels of sophistication. While big corporates already possess these machinery small businesses struggle with traditional machinery and manual labor.

Machinery loans were introduced to fund machinery purchases of MSMEs so they can improve efficiency of their production process to compete against large companies. This is how machinery loans help MSMEs grow their businesses. Machinery loans for MSMEs can be obtained from banks, NBFCs, digital lending platforms and other financial institutions.

Types of machinery loans

There are countless different machines in the world that have unique purposes. Some loan products are tailored to specific machinery that are in high demand in the market. Here are a few types of machinery loans prevalent in India:

• Construction equipment
• Medical equipment
• Manufacturing and processing equipment
• Electronics & appliances
• IT & office equipment
• Automobiles and allied industries equipment
• Aviation industry equipment
• Printing equipment
• Hotel industry equipment
• Plastic & packaging equipment

Advantages of applying for a machinery loan

With the right machinery loan, a company can reap multiple benefits apart from funding for the machinery. Here are a few benefits of availing machinery loans from Indian financial institutions:

• Funding for the purchase of large and expensive machinery

Many industries require the best machines for production. There are companies in India importing machines for spiking their production and quality levels. This would mean that the total cost of the purchase of machinery is a huge amount, especially if it is a small business.

Machinery loans in India can fund up to 90% of the total machine cost. Adding production capacity and improving the quality of goods results in an increased number of orders and revenue.

• High loan amounts

Since equipment purchases are expensive, loans of up to ₹25 crore are sanctioned under the machinery loans category. Usually, banks insist on collateral for loan applications requesting high loan amounts.

• Tax exemption

According to the Income Tax Act, the interest paid on a business loan is tax deductible. This means that you can deduct the total interest paid in an assessment year from the total tax to be paid for that assessment year. This can reduce your tax burden and free up cash for other expenses.

Also read: What are the tax benefits on a business loan?

• Hypothecation

Many lenders allow businesses to take machinery/equipment loans under hypothecation. This means that the machinery you purchased with the help of the loan serves as the collateral and if you fail to repay the loan, the lender has the right to take possession of the machinery. Hypothecation allows businesses to apply for large loans without having to worry about finding collateral.

Features of a machinery loan

Given below are a few features of machinery loans sanctioned by the financial institutions including fintech companies in India:

• Banks and NBFCs can sanction up to ₹25 crores to finance machinery needs of businesses. Generally, these institutions offer up to 90% of the purchase cost for new equipment and up to 75% of the purchase cost for used equipment.
• Hypothecated machinery loans need no collateral as the machinery you have purchased serves as the collateral. Although, in some cases, when the loan amount is significantly high then lenders will request additional collateral.
• Some machinery loans allow businesses to upgrade or repair the existing equipment.
• These are long term loans with repayment periods ranging from 3-7 years.
• Machinery loan interest rates in India average between 15%-20%.
• Machinery loans from online lenders have quick approval and disbursal time.
• Websites of many financial institutions have machinery loan calculator that helps you calculate EMIs and adjust your repayment period to determine the repayment tenure feasible for your company.

Eligibility requirements for a machinery loan

Eligibility requirements for machinery loans differ according to lender institutions. Given below are some of the common eligibility requirements for machinery loans in India:

• The age of the applicant should not be less than 21 years, and not more than 65 years
• The business should have been operational for at least 2 years
• The average annual turnover of the company should be ₹10 lakh

Documents required for a machinery loan

Here are a few machinery loan documents that lenders ask businesses to submit along with their application:

• Identity card (Aadhaar card or Voting ID)
• PAN card
• Books of accounts for the last 3 years from the date of application
• KYC documents of the company
• A copy of the tax filings from the last two financial years
• Bank statements of the past three years
• Details of the machines purchased in a business
• Quotation of machinery to be purchased

Examples of machinery loans in India

Here are few examples of machinery loan products of a few prominent lenders in India:

Lender name	Machinery loan type	Description/purpose
SBI	Healthcare business loan	Loan for the purchase of medical equipment including ancillary equipment
Hiranandani Financial Services	Loans for industrial machinery and equipment business	Loan for the purchase of new industrial equipment or to repair or upgrade existing equipment
YES BANK	Construction equipment loan	Funding for all types of construction and material handling equipment
Bajaj Finserv	Loan against machinery	Loans disbursed for the purchase of new equipment and repair of existing equipment

Government schemes that help with machinery purchases

The most prominent government loan for machinery purchase is the Credit Linked Capital Subsidy Scheme (CLCSS). This scheme was introduced by the government to facilitate technology upgrades by providing upfront capital subsidy to small scale industry units, including tiny, khadi, village and coir industrial units.

The subsidy is extended to businesses looking to modernisation of their production equipment and techniques. The Scheme provides 12% capital subsidy to small businesses for the induction of well-established and improved technology in selected sub-sectors/products approved under the scheme.

Machinery loans give the necessary boost to MSMEs to increase production and quality standards to compete in the global market. To obtain machinery loans you can approach banks, NBFCs, co-operative banks and online lending platforms.

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