Enhance cash flow with Machinery Loan
Businesses run on a variety of resources deployed in producing goods and services. They sell goods and services to customers to complete the business cycle. In completing the cycle for businesses, several elements play vital roles. These include capital, men, materials, machinery, equipment, ownership, land and building and processes.
In the production of goods and services, businesses need machinery and equipment besides land and building. They need trained people to operate the machinery. They need raw materials and other consumables to convert raw materials into useful products and services for customers. They need electric power to run machinery and equipment. Once production is complete, they need to store the finished product and move it through the distribution channels to reach the customers. All these need working capital to keep the process moving.
Thus, businesses need fixed capital and working capital to run them. Typically, business owners avail term loans for capital investment and working capital loans for day to day operational expenses. Most lenders including NBFCs such as Tata Capital offer various types of loans including business loans to meet the fund requirements of business owners. One such loan is machinery loan.
One important aspect of businesses is cash flow. Cash flow is vital as it enables smooth running of any business. There is a time gap before investments yield revenues, especially when starting a new business. Now, cash flow is the flow of cash coming in and going out of a business required to run the business. Businesses require funds to buy machinery and raw materials to manufacture products. They need to pay salaries to workers operating the machinery. Before the product gets sold businesses have to find the funds to manufacture the product. Once the products get sold, revenues flow into the business. When there is more money coming in than going out in any given period, then the cash flow becomes positive. On the other hand, when more money is going out than coming in, then cash flow becomes negative. Typically, businesses don’t face working capital issues when there is positive cash flow. However, when there is negative cash flow they will need money to buy raw materials or power or pay salaries or rent. During these times, business suffers and businesses resort to working capital loans to tide over the situation.
Why Machinery Loan
Since different types of industries require different types of machinery, the machinery loan or equipment loan comes under the business loan umbrella to cover a variety of machinery and equipment. Machinery loan helps business owners to produce goods and services at optimal cost. Choosing the correct machinery is important to manufacture quality products. Businesses choose machinery to
- Upgrade production systems
- Improve productivity
- Manufacture new products requiring machinery different from existing machinery
- Refurbish existing machinery
- Maintain existing machinery
Cash Flow Benefit through Machinery Loan
The net effect of a machinery loan is to bring down the pressure on cash flow. For instance, with a machinery loan, businesses can bring down production cost, prevent wastage of raw materials, increase productivity, produce more, and encounter fewer breakdowns. Proper machinery and equipment will consume lesser power. These new machines can reduce overall running cost.
Equipment loan is efficient when leased as there is flexibility in seasonal businesses. Instead of buying equipment and keeping it idle during the off-season it makes sense to lease equipment with an equipment loan for the high season. Leasing through equipment loans is a good option when the business can run machinery throughout the year.
In today’s technology-driven world, automation is desirable for any business so as to improve productivity and quality. Automation leads to lesser human intervention resulting in superior quality and lesser outflow on manpower.
There are machinery and equipment that run on critical components. Maintaining these machines and equipment in top condition involves replacing critical components and high-value spare parts quickly when they break down. Machinery loans come in handy in such situations as the business need not take a working capital loan which costs much higher than machinery loan affecting cash flow badly.
Machinery loan, being a longer term secured loan, costs less as rate of interest is low. By taking the machinery loan instead of a working capital loan, the cash outflow is lesser. Machinery loans or equipment loans are highly useful for any business as they are timely financial instruments for overcoming cash flow and other issues.