Investing in heavy road construction equipment is essential for starting or expanding a road construction business. However, the high costs of purchasing and maintaining this equipment can strain cash flows for small and medium contractors. This is where loans for road construction equipment come into the picture.
This blog post will clarify everything contractors need to know about availing road construction equipment finance.
Understanding Road Construction Equipment Finance
Road construction equipment loans allow contractors to buy necessary machinery like excavators, bulldozers, road rollers, dump trucks, etc., without paying the full amount upfront. Instead, contractors pay a certain percentage as the down payment or margin money. The loan provider finances the remaining amount the contractor pays back in equated monthly instalments (EMIs) over a fixed tenure.
Construction equipment loans offer financing for both new and used/pre-owned machinery. Moreover, road construction equipment finance makes the goal of owning such advanced yet expensive equipment a reality for aspiring contractors.
Importance of Road Construction Equipment Finance
The main reasons why financing for road building machinery is important is because of the following reasons:
1. Acquire Advanced Equipment
Due to budget constraints, smaller contractors cannot always afford cutting-edge construction equipment. Equipment finance facilitates the procurement of technologically advanced machinery with features contractors need for productivity and safety.
2. Improve Project Execution
The latest feature-rich machinery not only enhances productivity but also improves the quality of road and highway construction. Superior-grade concrete roads and asphalt highways are constructed faster while reducing rework. Efficient project execution leads to early completion, helping contractors bid for or take on more road projects.
3. Reduce Equipment Hiring Costs
Renting equipment whenever contractors bid on a new project eats into their revenues. Construction equipment loans allow outright purchase of most machinery contractors rely on for their projects. Eliminating recurring rental costs on essential equipment saves money over the long term.
Key Features of Road Construction Equipment Finance
While loans offered by different financial institutions have their own terms and conditions, some common features contractors should consider:
1. Loan Amount and Margin Money
The loan amount depends on the cost of the machinery purchased, and the margin is the down payment the applicant needs to pay themselves. Margin money may range from 20% to 35%, depending on the provider, loan amount, relationship history, etc.
2. Interest Rates and Repayment Tenure
Construction equipment loan interest rates start at around 9% p.a., but actual rates depend on the provider, loan amount, and applicant creditworthiness. Repayment tenure is usually set between 12 months (1 year) and 84 months (7 years). Longer tenures allow lower EMIs. Interest rates and repayment tenure may differ with the lender’s policies.
3. Processing Time and Documentation
When existing financial documents are in order, loan approval and disbursal take up to a week. Compared to traditional business loans, the paperwork required is usually minimal.
How to Choose the Right Construction Equipment Finance
Road contractors should assess different loan offers on parameters like:
1. Equipment Needs and Budget
First, finalise the exact equipment models required according to the scale of the projects handled. This indicates the loan amount needed. Next, determine budgets for down payment, as higher margin money decreases interest outflow.
2. Interest Rates and Repayment Terms
Compare interest rates offered by various equipment financiers, as even a 1% difference significantly impacts overall outflow. For instance, Shriram Finance provides competitive interest rates when compared to many other financial institutions for construction equipment loans. Based on your budgets and expected project revenue streams, opt for the longest suitable repayment tenure.
3. Ownership Cost vs Leasing Cost
Compare loan EMIs and operating and maintenance expenses associated with owning equipment against long-term rental costs to determine which option makes better financial sense.
Eligibility Criteria of Road Construction Equipment Finance
While eligibility terms vary across providers, applicants for road construction equipment finance generally require:
- Ownership of an established construction/contracting business
- Prior experience executing road construction projects
- Capacity to pay the margin money and provide security as needed
- Proper documentation like business registration proof, GST certificate, IT returns etc.
Documents Required for Road Construction Equipment Finance
Contractors must typically submit the following documents when applying for road construction equipment finance:
- Photo ID Proof
- Address Proof
- The last 3 months’ bank statements
- Income Tax Returns (ITRs)
- Business registration documents
- GST certificate
- Audited financial statements
- Project completion certificates
- Proforma invoice of equipment
Application Process for Road Construction Equipment Finance
Here are the steps to follow to get a road construction equipment finance:
Step 1: Determine equipment model and specifications along with dealer details
Step 2: Engage with preferred construction equipment financiers or dealers for financing options
Step 3: Fill loan application form along with submitting the required documents
Step 4: Financier evaluates application and shares loan offer
Step 5: Sign the loan agreement accepting the terms & conditions
Tips for Availing of Favourable Loan Terms
Road contractors can negotiate better pricing or tenure on construction equipment finance by:
1. Maintaining a Strong Credit History
A high individual or business credit rating signifies lower risk for financiers. This enhances the likelihood of approval and improves interest rates.
2. Building Relationships
Developing long-term relationships with financiers through repeat transactions helps unlock preferential pricing and tenure benefits.
3. Exploring Multiple Options
Compare equipment loan deals across banks, NBFCs, and dealers. More options allow for identifying the most reasonable financing terms.
The Bottom Line
Acquiring advanced road construction machinery through loans helps contractors improve productivity and take on larger projects. Comparing offerings from multiple construction equipment financiers can help identify financing with the most suitable loan amount, interest rate, and tenure. Maintaining prompt EMI repayments also enables contractors to establish credentials for availing future upgrades at attractive terms.
