Characteristics of Equipment
Financing
Purpose, nature and terms of financing
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Equipment financing is generally extended
for standard equipment where the equipment is commonly utilized and its
value is known.
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Equipment financing is mainly prevalent
for quantum between Rs. 5 lakh to Rs. 10 crores and for a timeframe of
3-5 years.
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Between 70 – 80% of the cost of the
equipment is generally provided in case of equipment financing. Only the
cost of the main equipment is considered for the purpose of computing the
eligible loan amount, cost such as freight and duties for movement to the
place of the borrowers, erection and commissioning charges are generally
not financed, as these do not enhance the value of the security to the
lender in case of default.
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Since the financing is provided mainly
for movable standard equipment with a reasonable resale value, the focus
is primarily on meeting the terms of the transaction such as the down payment
and the targeted IRR. But most financiers also ensure that the borrower
unit is fully functional and registering cash profits (atleast). Reputed
financing institutions also insist of satisfactory financial position indicated
through satisfactory coverage ratios (Financial charges coverage and Debt
Service coverage).
Standard Terms of Financing
Since these loans are for standard
equipment and the quantum involved is not very large, the terms for these
loans are highly standardized.
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As such financing is extended for standard
equipment, the estimated cost of equipment, the proportion of financing
and the terms of financing are generally standardized.
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Repayment is in equated monthly installments
(including the principle repayment and interest) as against term loans
where the principle repayments are repaid in equal installments apart from
the interest accruing on the outstanding balance
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Repayments are secured through post-dated
cheques to minimize follow–up efforts, costs and as an in-built form of
monitoring.
Customisation to suit customer convenience
The term of financing, eligible
list of equipments financed, the rate of interest, mode of repayment and
the proportion of lender exposure are standardized. However, within the
restrictions imposed by standardization, the equipment financing is also
tailored for borrower convenience.
For instance in case the borrower
is unable to part with his down payment for the equipment but has a fixed
deposit that could be provided as security, the same is accepted and the
installments worked out accordingly. Stepped up/stepped down EMIs, beginning/end
of month repayments, advance EMIs, etc. are worked out as per the requirement
of the borrower while ensuring that the requisite Internal Rate of Return
(IRR) accrues to the financing institution.
Back to Financing from NBFCs
Introduction to Equipment Financing
Equipment Financing in India
Procedure for availing Equipment
Finance
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