List of Machinery Finance Mistakes MSMEs Should Avoid

Read Time:5 Minute, 0 Second

Introduction

Small businesses are the backbone of the Indian economy, some of the reasons being they are very good at creating jobs, manufacturing goods & services, and supporting the regional economy as well. However, MSMEs require machinery, tools, and equipment that are costly investments that most small business owners cannot afford to pay cash upfront due to cash flow issues.

A machinery loan helps MSMEs buy equipment that is necessary for their business operations. However, obtaining a machinery loan can be confusing sometimes.

In this article, we will discuss how you can apply for a machinery loan and educate you on some of the common mistakes MSME business owners could avoid when applying for a machinery loan.

How to Apply for a Machinery Loan

Apply machinery loan Application process: Determines much about a business, understanding the application process will help businesses avoid confusion and get the best deal. Here are the steps in applying for a machinery loan

a) Determine your needs: Before applying for a loan, you need to clearly determine what kind of machinery you need and why. Understand whether the new equipment will increase production or help you expand your business. This will give you a clear idea of the loan amount needed and will help you plan better.

b) Researching Lenders: Machinery loan is offered by many financial institutions, such as banks and NBFCs. Eligibility and comparison of interest rates, loan terms, and repayment options need to be observed properly and considered to apply for a loan for the business.

c) Document Preparation: Before loan sanction, lenders would normally expect few documents from you. Such as;

Business registration and ownership proof
Financial statements of the company
Banking details
Quotations or Invoices of the Machinery being purchased

Ensure that your documents are in order before applying. Incomplete documents will cause the loan application process to be delayed which might affect your cash flow.

d) Present your Application: Once you have selected a lender and organized your documents, the next step is to present the loan application. The lender will study the credit-worthiness of the business, the ability of the business in repayment and the purpose of the loan application before approving or rejecting your loan application.

e) Oversee Loan Terms: Always read the terms and conditions of a loan before signing the agreement. This is your surety to confirm the interest rate, tenure of the loan, and how you repay it. For a loan to be in your budget, you should not be charged with any hidden fees or charges.

Common Mistakes in Machinery Finance

Here are some common mistakes to avoid when looking out for an MSME business Loan:

a) Borrowing More Than Required: One of the big mistakes small business owners make is, borrowing more than they require. This might be because they think extra funds may help in the short term, but borrowing more than the required loan amount leads to more interest being paid and more debts. Hence, always calculate what the actual requirement is and avoid taking unnecessary debt in the process.

b) Avoiding to read T&C: Do not enter into loan agreements without reading terms and conditions. Some loans might have floating interest rates, while others might have some costs to be incurred by you, which will increase your burden of repayment. Evaluate all aspects of the loan agreement, ask questions, and ensure that you clearly understand it when signing it.

c) Not comparing loan offers: Most businesses also fail to compare loan offers from various lenders. The same financial institution may have several interest rates, different time periods for loans, and varying levels of processing fees. Failure to compare will result in high costs that businesses pay for their loans, so take your time to shop around and get the best deal.

d) Poor Financial Planning: Many MSMEs create no financial plan before applying for a loan, and they do not think about how the loan repayments will affect cash flow. Loan repayments can easily affect business operations if not planned well, it also may lead to missed payments, causing penalties. Always have a financial plan on how you will pay the loan so your business can cope with the monthly repayments.

e) Failure to Consider the Repayment Schedule: Ensure the repayment schedule is suitable for your business cash flows. The longer the tenure, the smaller the monthly payments but it will mean paying more in interest over time. A shorter tenure might have higher monthly payments but lower overall costs in terms of interest.

f) Your Business Credit Score Being Ignored: Your business credit score plays a very essential role while applying for a Machinery loan. Most MSMEs neglect their scores and suffer loan rejection or accept the higher interest rates. Ensure you have kept your credit good, for example, by clearing earlier debts so that you apply for another loan after ensuring that your accounts are in order.

g) Use of Loan for Non-Machinery Purposes: Some of the MSMEs end up misusing the machinery loan funds for other debts or other overhead expenses and end up in cash flow problems hence cannot pay back the loan. Always make sure to use the loan amount for the purpose you availed for.

Conclusion

Securing a machinery loan is often the biggest step toward business advancement and productivity for any MSMEs. So avoiding some of the mistakes discussed above can be stopped. Careful planning, a comparison of loan offers, and good credit scores are all keys to successfully financing one’s machinery needs. Hence, with the proper approach, machinery loans can be appropriately used to enhance the business operations of MSMEs without any unnecessary financial issues.

NBFCs are one of the best options for a business loan, especially for a machinery purchase or a machinery loan. As they proved with minimal documentation, quick process, fully digital verification, etc. They also offer better interest rates and terms to the MSMEs and support them to grow their business.