Machinery and Equipment Finance Loan: Fund Your Business Assets

When your business needs a new CNC machine, a fleet of delivery vehicles, cold storage units, or a packaging line, paying for it upfront from your cash reserves can cripple your working capital. Machinery and equipment finance loans let you acquire the assets you need while spreading the cost over the useful life of the asset.

Here is a complete guide to equipment finance in India: how it works, what it costs, and how to get approved.

Overview

Machinery and equipment finance is a secured term loan where the asset being purchased serves as the primary collateral. This is sometimes called an asset-backed loan or a hire purchase arrangement. Since the lender holds a hypothecation charge over the equipment, rates are lower than unsecured business loans.

In India, this type of finance is offered by banks, NBFCs, and specialized equipment finance companies. SIDBI, for instance, has dedicated machinery loan products for MSMEs. Banks like SBI, HDFC, ICICI, Axis, and Kotak all offer equipment finance in their MSME or corporate banking divisions.

Interest Rates

Lender	Interest Rate (per annum)	Typical LTV (Loan to Value)
SBI Equipment Finance	9.50% to 13.50%	Up to 85%
HDFC Bank	11.00% to 17.50%	Up to 80%
ICICI Bank	10.75% to 16.00%	Up to 80%
Axis Bank	12.00% to 18.00%	Up to 75%
SIDBI Equipment Loan	9.00% to 12.50%	Up to 85% for MSMEs

LTV refers to how much the bank will fund as a percentage of the asset’s purchase price. You need to arrange the remaining amount (the margin) from your own funds or other sources.

Eligibility

• Business entities (proprietary firms, partnerships, LLPs, Pvt Ltd, Ltd companies) with minimum 1 to 2 years of operations.
• The equipment must be for legitimate business use, not personal.
• Machinery should be new (used/refurbished machinery may be financed at lower LTVs by some lenders).
• Promoter’s CIBIL score above 650 to 700.
• Positive cash flows or evidence of income to service the loan.

Documents Required

• Proforma invoice or purchase order from the equipment supplier
• Business registration documents
• GST registration and returns
• Audited financials for the last 1 to 2 years
• Bank statements for the last 6 to 12 months
• KYC of promoters
• Udyam Certificate (for MSME eligibility)

Application Process

1. Get a proforma invoice from the supplier. Banks need to know exactly what machine you are buying, its technical specifications, and the purchase price. Get a formal quote from the supplier.
2. Approach lenders who specialize in your industry. Some banks have dedicated desks for pharmaceutical equipment, agricultural machinery, or textile machinery. They understand asset values better and process faster.
3. Submit your application and financial documents. The bank will evaluate your business’s ability to service the loan and the market value of the equipment.
4. Asset valuation and hypothecation. The lender creates a hypothecation charge on the equipment. If you default, they have the right to repossess and sell the asset.
5. Disbursement directly to the supplier. The loan amount is sent directly to the equipment manufacturer or dealer, not to your account. This protects both you and the lender.
6. Repayment via EMI. Tenure is typically 3 to 7 years, aligned with the useful life of the asset.

Leasing vs Buying with a Loan

Some businesses prefer leasing equipment over taking a loan. With leasing, you never own the asset, but your cash commitment is lower upfront. With a loan, you own the asset and can claim depreciation. For most Indian MSMEs that use the equipment intensively over many years, buying with a loan makes more financial sense than leasing.

FAQ

Can I finance second-hand or refurbished machinery?

Yes, some NBFCs and specialized equipment finance companies fund used machinery. The LTV is typically lower (50 to 65%) and the lender will want an independent valuation of the equipment. PSU banks are generally more conservative about used machinery.

What happens if the machinery breaks down and I cannot repay?

Machinery breakdown is not considered a valid reason to stop loan repayment. The loan obligation continues. However, if your business faces financial stress, approach the bank for a restructuring under the RBI’s resolution framework before the account is classified as an NPA.

Is there any subsidy on machinery loans for MSMEs?

The Technology Upgradation Fund Scheme (TUFS) for the textile sector and similar schemes in other industries offer interest subsidies on machinery loans. Check with the Ministry of Textiles or your industry association to see if your sector has a similar program.