The manufacturing sector is the backbone of any country's economy. In India, this sector contributes significantly to the national Gross Domestic Produce (GDP). Yet many small and medium manufacturers struggle with outdated equipment and technology. Modernising equipment through machinery loans can transform a manufacturer's productivity and profitability. Here's an in-depth look at how small business loans for machinery can boost efficiency for Indian manufacturers.
The Need to Upgrade Manufacturing Technology
Old machines slow down production and escalate maintenance costs. Manual processes reduce accuracy and increase errors. And outdated technology and equipment simply can't meet today's demands for higher output and consistent quality. Therefore, upgrading to automated, high-tech machinery is no longer a luxury but a necessity for manufacturers.
The loan benefits for manufacturers of upgrading equipment include:
- Increased Production Output: Newer machines can produce faster with less downtime, which means the output can be typically increased by 25% to 90% or more.
- Improved Product Quality: The use of advanced computerised machinery can enhance precision and accuracy, resulting in lower defect rates and higher quality standards.
- Enhanced Efficiency: Automated equipment can process raw materials faster. Moreover, new technology also reduces human errors and inefficiency in manufacturing processes.
- Reduced Labour Costs: With automated equipment, less manual labour is required, which significantly cuts labour expenditures.
- Decreased Waste: High-tech machines are designed to optimise material usage. Fewer scrap materials mean lower waste expenses.
- Energy Savings: Modern power-efficient machinery can lower electricity consumption, thereby reducing energy bills.
The Challenges of Funding Upgrades
However, upgrading technology requires significant capital investment. New Computer Numerical Control (CNC) machines, 3D printers or laser cutting equipment can cost tens of lakhs or crores of rupees. And most small and mid-sized manufacturers lack sufficient reserves or cash flow to self-fund these purchases. Therefore, taking out machinery loans is usually the only viable option.
Financing Options for Equipment Loans
Several options exist when seeking small business loans for machinery:
- Term Loans: Financial institutions offer medium to long-term industrial loans of 3-7 years for buying equipment. The loan repayment plans include Equated Monthly Instalments (EMIs) spread over the loan duration.
- Loan Against Property: Manufacturers can mortgage property to obtain lower interest rate loans for buying machinery. Only the factory property should be placed as collateral.
- Unsecured Business Loans: Some Non-banking Financial Companies (NBFCs) provide machinery loans without collateral for established businesses with good creditworthiness.
- Lease Rental Discounting: Leased equipment's future rentals can be discounted to get an upfront lump sum amount for buying that machinery. The lease company directly pays the vendor.
- Vendor Partnerships: Reputable machinery vendors offer easy financing partnerships with financial institutions, which facilitate smooth industrial loans for their machines without collateral.
- Invoice Discounting: The loan amount is sanctioned against a manufacturer's accounts payable invoices. Once the client clears the invoice, the loan is repaid.
Equipment Loan Interest Rates
Interest rates for small business loans for machinery in India typically starts from 8% per annum depending on:
- Type of machinery: General-purpose machines may have lower rates than highly specialised equipment.
- Loan amount: High loan amounts may attract lower interest rates.
- Business vintage: Older or seasoned manufacturers may get better rates than new companies.
- Monthly/Annual sales turnover: Higher revenue companies are seen as more creditworthy.
- Collateral: Loans against property get lower interest rates because of the collateral provided. Unsecured loans have higher rates.
- Credit score: Manufacturers with good credit scores enjoy lower interest rates.
Smart Tips for Taking Machinery Loans
When applying for small business loans for machinery, manufacturers should follow these tips:
- Get quotes from multiple loan providers to compare interest rates.
- Opt for longer tenure loans of 5-7 years to ease repayment pressure.
- Avoid very short-tenure loans of less than 3 years, as the EMIs can be high.
- Negotiate for lower interest rates for secured industrial loans or those above ₹50 lakhs.
- Choose financial institutions that offer transparent fee structures without hidden charges.
- Verify if the financial institution offers a moratorium period and prepayment flexibility.
- Ensure the loan covers both costs of equipment and transportation, installation, and testing.
Conclusion
Upgrading manufacturing technology is vital for Indian industries to become globally competitive. Machinery loans enable easy financing for cash-strapped manufacturers to modernise their factory equipment. Proper management and utilisation will ensure the benefits outweigh the loan repayment plans. Seeking expert advice and availing attractive financing schemes for Micro, Small, and Medium Enterprises (MSMEs) can make the loan process smooth and hassle-free.
FAQs
1. What types of machinery can be financed with a loan?
Machinery loans can finance all major types of equipment for manufacturing and production including CNC machines, packaging equipment, printing machines, plastic molding machines, textile machines, welding equipment, and more. Both new and used machinery can be financed.
2. How can small businesses qualify for machinery loans?
Small manufacturers can qualify for machinery loans by having a good credit history, steady cash flows, at least 3 years in business, and collateral such as property or fixed deposits. Check for government schemes as well as they offer concessional loans to MSMEs to upgrade technology.
3. What is the process of applying for an equipment loan?
The loan application involves submitting business financials, Know Your Customer (KYC) documents of owners/directors, quotations of machinery, details of collateral, and processing fees. The loan provider will check creditworthiness and viability before approving the loan. The entire process usually takes around 1-3 weeks.
4. Can machinery loans cover both new and used equipment?
Yes, loans can finance both new and good-quality used machinery. Used equipment is cheaper, so the loan amount and instalments are smaller. However, interest rates tend to be higher for financing used machines.
5. Can machinery loans help small manufacturers scale their operations?
Absolutely. Technology upgradation via machinery loans is a stepping stone for small businesses to increase productivity, lower costs, improve quality, increase output, and scale up revenues as well as profitability.
6. What are the long-term benefits of financing new machinery?
Key long-term benefits include ownership of modern assets, improved competitiveness, greater manufacturing capabilities, increased expertise due to training, lower breakdowns, and better inventory management through automation.
7. How do machinery loans contribute to sustainable manufacturing practices?
Loans enable installing energy efficient and waste reducing machines. Automation also improves safety and makes processes more environment-friendly. This contributes to sustainable manufacturing.