Equipment financing becomes critical when a sudden or a planned requirement for machinery/equipment arises. The borrower can take a loan/lease to buy/rent only a physical asset. This is important because, in equipment financing, the asset in question automatically becomes the collateral. If the borrower defaults, the lender can seize the asset. The risk involved in equipment financing is lower than other types and levies a lower interest rate.

Pre-Requisites for Equipment Financing

There are no specific criteria that make a borrower eligible for equipment financing. Each lender has a different set of pre-requisites. However, the following are some usual requirements:
  1. Business Type: Equipment financing can be given to private and public companies, proprietorships, trusts, corporations, and contractors involved in construction or mining activities.
  2. Age: The borrower should be at least 21 years old at the time of the procurement and should not be more than 65 years at the end of the maturity period.
  3. Tenure: The business entity should be profitable for the past 3 years and should have had geographical stability since the past 2 years.
  4. Income Tax Return (ITR): The borrower should have 2 years of ITRs.
  5. Legal Grounds: The business entity should not have any pending legal matters.
  6. CIBIL score: Credit Information Bureau India Limited (CIBIL) is responsible for giving and maintaining credit risk ratings to business entities. This rating is based on the existing and past loans taken, along with the diligence in repayment of loans.

Documents Needed for Equipment Financing

When availing equipment financing, the borrower is required to submit the following documents for information verification:
  1. Details of the asset being purchased and its supplier details
  2. ITRs of last 2 years, along with audited financial statements
  3. Registration proof of the business, like partnership deed or certified copies of Memorandum of Association/ Articles of Association
  4. Recent passport size photographs of applicant/co-applicant
  5. Address proof of business
  6. Resident address proof of applicant/co-applicant
  7. Bank statement of last 6 months
  8. Know Your Customer (KYC) documents
  9. Identification (ID) proofs, like Voter ID, Passport, Aadhaar Card, PAN Card, etc.

Equipment Financing Procurement

To procure equipment financing, the borrower should move ahead in the following way:
  1. Right Lender: It is necessary to comprehensively compare the interest rates, processing charges, hidden fees, loan tenure, documentation required, etc. of various lenders and then select the most appropriate one.
  2. Credit History: It is necessary to maintain a good CIBIL score and credit history.
  3. Business Plan: The asset being purchased or leased should be part of a strong business plan that gives good returns.
  4. Documents: The borrower must keep all the documents prepared.
  5. Procurement Process: The process to procure the loan should be time-saving and hassle-free.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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