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Introduction to Machinery Term Loans
Machinery Loans is a financial loan taken by small businesses and medium enterprises. To meet the immediate production needs or expansion in future, machinery loan is one of the first major loans for a small company. Loans specifically for machinery provided by financial institutions help out these SMEs (small and medium enterprises). But there are certain myths and misconceptions associated with how to obtain machinery loans. Let us look at them one by one.
Myths About Machinery Loans and their Reality
Myth 1 : Traditional Institutions offer many options
Reality: While this might be true for personal and home loans, the machinery loans are few far in between. The paperwork for traditional loans is extensive and tedious. Many small businesses are unable to provide so many details and financial statements. The banking paperwork leaves the entire process to be handled in a very complex manner. All this requires too much financial and professional assistance, impossible for a small business to handle. Also, the banking interest rates are very high for such a small loan. The NBFCs and other new-age financial institutions can provide easy installment loans based on the proprietary KYC details.
Myth 2: Machinery Loans requires high collaterals
Reality: There is no requirement of high collaterals usually up to a certain limit and there are no additional collaterals required apart from that of the machinery being financed. Some companies take no collaterals at all. However, interest rate has to be taken care of in all the cases.
Myth 3: There is a long Approval and Disbursal process in Machinery Loan
Reality: This is untrue as machinery loans are meant for small enterprises so there is a conscious effort to keep the procedure simple and effortless. Modern methods of credit appraisal and quick documentation allow disbursal within 2 days and the SME can start their work immediately.
Myth 4: Lower loan amount is financed through machinery loan
Reality: Many entrepreneurs first feel that machinery loan amounts can have low asset to loan ratio. However, this is not true as many financial institutions give up to 90% of the asset value as a loan.
Myth 5: It is tougher to get a good interest rate
Reality: Machinery loans interest rates are available very easily on most websites of financial institutions. It is easy to get the idea of the minimum lending rate and finally negotiate the rate based on your credit standing, business criteria and other things.
Myth 6 : Pre-payment charges
Reality: Like in a lot of other loans such as personal loans, many people feel there is a pre-payment penalty. However, that is not the case on pre-payment of machinery loans.
Myth 7 : Loan amount has to be huge
Reality: The loan amount can be as low as Rs 2.5 lakhs or even less for small businesses. You have the opportunity to scale up slowly and get financed under various government schemes.
Myth 8 : Machinery Loan is only for New expansion
Reality: This is a very common myth. Small business loans/machinery loans are also given for the expansion, refurbishment, or replacement of the existing machinery. The aim is to help small businesses improve the overall productivity of their business.
Myth 9 : There is no ease of payment
Reality: They provide flexible options for repayment and also can vary interest rates depending upon your payment capacity. The tenure also varies usually from 6 months to 5 years giving ample time to scale up the business and pay-off from the revenues.
Myth 10 : No support
Reality: Many financial institutions get involved with the business per say on the discretion of the owner / borrower and also provide logistical, business and market intelligence. They take it upon as personal businesses consulting to help really small businesses get off the ground so as to enable them to reach their potential and in the process pay-off the loan easily.
Machinery loans are the backbone of most economies. The concept of self-employment and entrepreneurship would not take off without the concept of machinery loan, which acts as a no-frills attached simplistic loan for simple businesses.
Getting a machinery or business loan will be easy with a clear set of documentations and KYC in place. Ensure to get your business plan in place along with the proof-of-concept to get the best possible deal on the loan.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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