Buying equipment is one of the most common reasons small business owners seek financing. With an equipment loan, you can acquire anything from desks and furniture for your office to heavy machinery, new equipment in healthcare, construction, printing, packaging, plastics and other approved industry segments without shelling out the full price upfront.

But you may ask—What is equipment financing? How does equipment financing work? Should you take out an equipment loan? Read on to know more!

What is equipment finance?

Equipment finance is an ideal option for those looking to buy new equipment or upgrade existing machinery without straining the working capital. The equipment financing comes in handy for both MSMEs and large enterprises. Business owners availing equipment loans also enjoy tax benefits. 

What is the purpose of equipment finance?

The purpose of equipment financing is finance for the purchase of approved equipment. Equipment loans are designed for industries that offer revenue-generating opportunities through the acquired asset. You may take out an equipment loan while starting out or to scale up your operations further.

Who qualifies for equipment financing?

Any business that utilizes equipment and machinery can make use of equipment financing. This includes things such as medical equipment, farming machinery, furniture, computers, and machinery utilized by your business.

Qualifying for equipment financing is another thing altogether. Since equipment loans tend to be on the relatively conservative type of financial product, you will need to prove your creditworthiness, and you should be able to demonstrate the ability to service your equipment loan. While applying for an equipment loan, you will need to select the right equipment financer—the one that finances your type of equipment.

Why use equipment financing?

Consider the following scenario: 

  • You need expensive equipment but can’t afford to purchase that equipment upfront

  • You need expensive equipment but don’t want to purchase that equipment upfront

  • You need to replace your equipment frequently because it has a short lifespan

  • You want the latest in technology

  • You need some combination of the above

Is equipment financing right for your business? If your answer is yes to any one or all of the above-mentioned scenarios, then equipment financing may be just right for your business. 

Equipment loan—the basics

An equipment loan is a loan taken out with the sole purpose of purchasing equipment for running your business. Typically, equipment loans are collateral-free loans as the equipment secures the loan—if you default or you can no longer afford to pay the loan, the equipment gets collected as collateral. This lowers the risk of the lender. Hence, in case of default, the lender may repossess the equipment to make up for damages. Many lenders offer unsecured loans—meaning you can avail an equipment loan without security. 

The interest rate, loan amount and loan tenure may differ from bank to bank. The repayment tenure generally varies from 2 years to 7 years depending on the lender and loan amount. Approval of the loan will entirely depend on the age of your business, turnover, and credit profile. Additionally, a good credit score also plays a significant role in securing a loan at low-interest rates.

Equipment Loan—Eligibility Criteria

The following are the general things that the lenders usually look for:

  • Business model—individuals from corporations, partnerships, trust, proprietorship, public firms, private firms, contractors, etc.

  • The minimum age at the time of application should be 21 years 

  • The maximum age at the time of maturity of the loan is 65 years 

  • The company should be making a profit for the last 3 years 

  • The company should be stable and be located in the same demography for the last 2 years

  • Income Tax Return (ITR) statements for the last 2 years

  • A healthy credit score, generally 700 and above

Documents required

  • KYC documents—ID proofs like Aadhar card, PAN card, Passport, Voter’s ID

  • Bank statement

  • Proof of residence

  • Business address proof

  • Business registration proof—Partnership deed/ Certified copies of MOA / AOA

  • Last 6 months’ bank statement

  • Recent passport size photos of the applicant 

  • Last two years of income tax returns and audited financials

  • Details of suppliers and types of machinery 

  • Track record—if applicable

  • Other documents as required by the bank

Benefits of equipment finance

Equipment loans come with a host of benefits, the main one being income tax benefits. Some of the other benefits are mentioned below:

  • Get up to 100% finance for new equipment from leading lenders

  • Get up to 90% finance from the majority of lenders

  • Equipment Finance offered by leading banks and NBFCs are generally collateral-free and unsecured in nature

  • Get pre approval in minutes with leading lenders

  • Hassle-free procedure for the borrowers

  • Flexible loan amounts

  • Flexible tenures available to repay the amount as per the borrower’s convenience and budget

  • Competitive interest rates are offered. However, this depends entirely on the creditworthiness and repayment history of the borrower

  • Avail income tax benefits

How to avail an Equipment Loan?

To avail an equipment finance scheme, you need to search for the right lender. There are many equipment loan providers in India. It is important to search for the one who offers the best in terms of reduced interest rates and extended tenure based on your credit profile. Shop around and see if you can get preapproved for a loan offer. Also, search for the lender that not only offers low interest rates but also has low processing fees. 

Once you have searched for the right lender, check that you meet the lender’s eligibility criteria. Have all the required documents on hand before applying for a loan. The easiest way to apply for a loan is online on the lender’s website. 

After submitting your application, the lender will check your eligibility and verify your documents. If everything seems to be in place, your equipment loan will be approved. The amount sanctioned will be disbursed into your bank account in as little as two days. 

The bottom line—is an equipment loan the right option for you? 

Ask yourself—how long do I need this equipment? The general rule of thumb is that if you need the equipment for more than two years, purchasing the equipment—either through your funds or a loan—is a good option. Also, consider this—how soon will this equipment wear out or become outdated? If you are using equipment that will quickly wear out or become outdated, you may want to consider leasing options, as you won’t have to deal with the outdated equipment.