Equipment Finance - Definition, Types, Eligibility and Importance
18 October, 2024
Synopsis:
Equipment finance lets you acquire machinery without a large upfront payment, spreading costs over time.
It provides access to the latest technology while keeping existing credit lines intact.
Equipment finance can offer tax benefits and help build business credit through timely payments.
You have just started your own business – perhaps a construction company, or maybe you have opened a small manufacturing unit. The ideas are rolling, the team is ready, and your vision is clear. But there’s one major roadblock – expensive equipment. You need the right tools to grow from forklifts to heavy machinery or even high-tech computers. However, buying them outright seems impossible with the current budget. You wonder, “How can I make this work?” That is when you discover equipment finance.
What is Equipment Financing?
Equipment financing could be a great solution if you're looking to acquire essential machinery or tools for your business without making a large upfront payment. It allows you to spread the cost over time, making the purchase more manageable and affordable for your company.
To secure an equipment loan, you will typically follow a few key steps. First, you identify the equipment you need and reach out to a banking institution, like HDFC Bank. The lender will then assess your business's financial situation and the value of the equipment you are planning to purchase.
Once approved, the lender will provide a loan that covers most of the equipment's cost, though you will probably need to make a small down payment. The equipment serves as collateral, meaning if you fail to repay the borrowed sum, the lender can seize it.
Importance of Equipment Financing
Maintain Liquidity
By opting for a business equipment loan, you maintain liquidity in your business. This means you have more cash for operational expenses, which is crucial for navigating unforeseen challenges and opportunities.
Improve Cash Flow Management
Financing equipment with structured payments helps you manage cash flow more effectively. Instead of a large upfront payment, you spread the cost over time and can align expenses with the equipment’s income-generating potential.
Access to Latest Technology
Business equipment financing enables you to upgrade to the latest technology without a significant initial investment. This keeps your business competitive by using advanced equipment that improves efficiency and productivity.
Tax Benefits
Small business equipment loan often offers tax advantages. The interest on financing payments or the depreciation of the equipment is deductible, reducing your taxable income and overall tax burden.
Preserve Credit Lines
Financing equipment helps keep your existing credit lines intact. This ensures you can access additional funds, if needed, without tying up your credit resources for large equipment purchases.
Flexible Payment Options
Equipment financing offers various payment plans, including lease or loan options, which can be tailored to fit your business’s cash flow cycle. This flexibility helps in managing your budget more effectively.
Enhance Business Growth
Accessing new equipment through financing can support business growth. Up-to-date machinery can increase production capacity, improve product quality, and meet growing customer demands, driving overall business expansion.
Reduced Obsolescence Risk
Financing equipment allows you to avoid the risk of obsolescence. You can choose short-term financing options to upgrade or replace equipment more frequently as technology evolves.
Building Business Credit
Regular, timely payments on equipment financing can help build and improve your business credit profile. This highlights your proficiency in managing debt, which can improve your prospects for acquiring future credit.
Types of Equipment Financing
Here are the details on equipment finance types
1. Hire Purchase
Hire purchase allows you to use equipment while paying for it in instalments. Once all payments are completed, ownership is transferred to you. This method is beneficial for acquiring expensive equipment like vehicles or heavy machinery. You make a down payment followed by regular instalments over the agreed term. It provides a way to manage large purchases without a significant upfront cost and ensures that you eventually own the equipment.
2. Operating Leases
An operating lease lets you rent equipment for a shorter period, usually less than the equipment's useful life. This option is suitable for high-tech equipment like computers or medical imaging machines that may become obsolete quickly. Operating leases often have lower monthly payments and less commitment compared to capital leases. At the end of the lease, you can return the equipment, upgrade to newer models, or extend the lease.
3. Capital Leases
Capital leases are long-term leases treated as ownership for accounting purposes. You lease equipment for most or all of its useful life, with the option to buy it at the end of the lease term. This type of lease is suitable for high-value equipment where you intend to use it extensively, such as manufacturing or construction equipment. Payments are generally higher than those for operating leases.
Eligibility for Equipment Finance
Here's the detailed information on equipment finance eligibility.
Business Eligibility: Loans are accessible to a diverse range of business structures, including corporations, partnerships, trusts, sole proprietorships, public and private companies, as well as contractors.
Profit and Stability Requirements: The business should demonstrate consistent profitability over the past three years and maintain operational stability within the same geographic area for at least two years.
Age Requirements: To qualify for the loan, applicants must be at least 21 years old and not exceed 65 years of age at the loan’s maturity.
Required Documentation: Applicants must submit documents such as Income Tax Return (ITR) forms for the previous two years, evidence of business continuity, and other pertinent financial records.
Credit History: A favourable credit history is crucial. The business must have a solid repayment history for any existing debts.
Bank Account Information: The business must present banking details from an account held with a scheduled commercial bank, showing at least 12 months of transaction history where most of their financial activities are conducted.
Equipment finance is an invaluable tool for businesses of all sizes, particularly those in sectors that rely heavily on machinery or technology. It provides flexibility, preserves cash flow, and allows businesses to access the latest equipment without making huge upfront investments. With multiple financing options, you can choose the right solution based on your needs and financial situation.
*Disclaimer: Terms and conditions apply. The information provided in this article is for informational purposes only and is general in nature. It is not intended to serve as specific advice for your unique circumstances. Policies, regulations, and legal requirements surrounding trade services are subject to change. We advise you to consult with a legal expert or refer to the latest official guidelines. Approval of services is at the sole discretion of HDFC Bank Limited and is subject to documentation and verification as per the Bank’s requirements.
