Consistent equipment investment is necessary to improve productivity. It may be more convenient and affordable for a business to lease equipment rather than directly purchase machinery with borrowed funds. However, existing equipment serves as collateral and security for obtaining loans at lower rates for financing other aspects of the business.

Financing

With equipment as collateral, Indian institutions lend at lower rates (sometimes by 100 to 300 basis points) and longer terms than unsecured financing. A typical equipment loan term extends anywhere from 7 to 10 years (based on the residual value) compared to an unsecured line of credit term of 2 to 5 years. Also, with equipment financing, business owners can claim depreciation on taxes. An equipment financing loan gives borrower’s the option to choose between a floating and a fixed rate line and does not require line rotation.

Leasing

Equipment leasing provides financing for all types of movable personal property (defined as anything other than real estate) to qualified commercial businesses throughout India. The equipment lease is a non-cancelable contract, extended for a specific period of time (typically five  to  seven years.) The equipment remains under the ownership of the Lessor and/or its assigns. In return for periodic rental payments, the Lessee has unrestricted use of the equipment throughout the duration of the contracted period and any renewal periods that extend thereafter.

Financial leases require the Lessee to maintain, repair and insure the leased equipment during the leased period. The Lessee is also responsible for all taxes, license fees, and similar charges imposed upon the property or payments under the lease.

Normally, the lease does not commence until the equipment has been delivered and is in operating condition. After approving equipment delivery and condition, the Lessee sends a formal certificate of delivery and acceptance to the Lessor. The lease begins when the Lessor receives the certificate. Payments are usually on a monthly basis.

Most Lease contracts in India require a minimum worth, equal to around 50 percent of the total net worth of the Lessee.  Lease payments are fully tax-deductible for the Lessee until the equipment is purchased through loans or another financing method.