Because the machine itself stands behind the loan, this is cheaper than borrowing the same money unsecured. The catch is the margin: lenders fund most of the invoice, never all of it, and the gap has to come from you.
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Financing a machine as equipment finance rather than on a plain unsecured loan costs materially less, for one reason: the machine is hypothecated to the lender. What surprises first-time buyers is the margin — the share of the invoice you have to fund yourself.
No lender funds 100% of a machine. Expect 70% to 85% of the invoice, with the balance — the margin, or margin money — coming from you.
The reason is resale. A machine loses value the moment it is installed, and a used machine in a distress sale fetches far less than its invoice. Funding the full price would leave the lender under-secured from day one. The margin is the buffer.
What that means practically: arrange the margin before you commit to the purchase. Buyers regularly sign a vendor quotation assuming full funding, then find themselves eight or nine lakh short with an advance already paid. Where the margin is genuinely unavailable, some lenders will consider a combination — equipment finance for the bulk, a small unsecured facility for the margin — but it costs more and it is better to plan around than to discover.
Broadly, anything that is identifiable, movable, has a resale market and a useful life longer than the loan.
The money goes to the vendor, not to you
Equipment finance is disbursed directly to the supplier against the proforma invoice, and the lender will usually verify the machine after installation. This is not distrust — it is how the security is established. Plan your cash flow accordingly: the loan will not pass through your account, so any advance you have already paid the vendor has to be reimbursed as part of the structure or treated as your margin. Say so upfront if you have already paid an advance.
The governing rule is simple and frequently broken: the loan must not outlive the machine.
A press with a fifteen-year working life comfortably supports a seven-year loan. Equipment that will be technologically obsolete in four years should not carry a six-year loan, because the last two years are spent paying for something you have replaced while also financing its replacement.
Set the EMI against what the machine will actually earn, and test it against a weak quarter rather than a good one. If the machine is expected to add ₹1.4 lakh a month of contribution and the EMI is ₹1.3 lakh, the project is too tight — any delay in commissioning or ramp-up comes straight out of working capital.
The machine is hypothecated: you own it and use it, and the lender holds a charge over it until the loan is repaid. You cannot sell or otherwise dispose of it without the lender's consent, and the charge is registered — with MCA if you are a company.
Two practical consequences. Comprehensive insurance on the machine is compulsory, with the lender named, and the premium is your cost for the whole tenure. And when the loan is repaid, get the no-objection certificate and ensure the charge is formally satisfied. An undischarged charge on a machine paid off three years ago makes your business look more encumbered than it is, and it will come up the next time you borrow.
Several government and state schemes support plant and machinery purchases by MSMEs — capital subsidies, interest subvention, and technology upgradation support in particular sectors. What is available changes by state, sector and year, so the sensible step is to ask your lender and your District Industries Centre what currently applies before you finalise the structure. CGTMSE cover can also apply where the margin or additional security is the obstacle. See the government schemes page.
Q1. How much of the machine's cost will a lender fund?
Typically 70% to 85% of the invoice value. The rest is your margin. Used or imported machinery usually attracts a lower funding percentage because valuation is less certain.
Q2. Is a machinery loan cheaper than an unsecured business loan?
Yes, generally by a meaningful margin, because the machine is hypothecated to the lender. Tenures are longer too, which lowers the EMI relative to an unsecured loan of the same size.
Q3. Can I finance used or imported machinery?
Both, with conditions. Used machinery requires a valuer's report and attracts a lower funding percentage and shorter tenure, with the machine's remaining life capping the term. Imported machinery involves additional documentation around the invoice, duties and shipment.
Q4. Does the loan amount come to my account?
No. It is paid directly to the vendor against the proforma invoice, and the lender usually verifies installation afterwards. Any advance you have already paid should be disclosed at application so it can be treated correctly.
Q5. What if I want to sell the machine before the loan is repaid?
You need the lender's consent, since the machine is hypothecated. In practice this means repaying the outstanding from the sale proceeds and obtaining a no-objection certificate. Selling hypothecated equipment without consent is a breach of the loan agreement.
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