How Plant and Machinery Loans Can Help You Invest and Boost Your ROI

Benefits of Investing in Plant and Machinery

Investing in plant and machinery is a smart move for businesses of all sizes. Here are some of the key benefits of making this type of investment:

Enhanced Productivity and Efficiency

Upgrading your plant and machinery can help you streamline your operations and improve your overall efficiency. Newer equipment is often faster, more reliable, and more accurate than older models, which means you can complete tasks more quickly and with greater precision. This can help you reduce your labour costs and increase your output, which can ultimately lead to a more profitable business.

Increased Capacity and Flexibility

Investing in new equipment can also help you expand your capacity and flexibility. With more advanced machinery, you can take on larger projects, handle more complex tasks, and produce a wider range of products. This can help you attract new customers and increase your market share, which can ultimately lead to greater revenue and profitability.

Improved Safety and Compliance

Newer equipment is often equipped with the latest safety features and designed to meet the latest regulatory standards. This can help you ensure the safety of your employees and comply with industry regulations, which can help you avoid costly fines and legal issues.

Types of Plant and Machinery Loans

There are several types of plant and machinery loans available to businesses. Here are some of the most common options:

Asset Finance

There are 3 main types of loans available to businesses looking to acquire equipment – Hire Purchase or HP, Finance Lease and Operating Lease.

You can use asset finance on both new and second-hand assets, which allows you to spread the cost of your purchase over fixed monthly payments of up to 7 years. Sometimes a lender will limit the term depending on the age of the asset, value, depreciation or other reasons.

Hire Purchase & Finance Lease Agreements

Hire Purchase & Finance Lease facilities allow businesses to acquire equipment through a series of payments over a fixed period of time.

Ownership of the equipment is on day one with a HP, where as with a Finance Lease the lender owns the equipment and lease it back to the customer over a set time period.

An operating lease is a contract that allows for an asset's use but does not convey ownership rights of the asset. These leases allow businesses to use the asset without incurring the high expenses involved in purchasing it.

These type of financing can be particularly beneficial for businesses that need to acquire expensive equipment but do not have the upfront capital to make a large down payment. There can be different tax benefits available with these facilities, however, it’s best to check with your accountant on the finer points.

Eligibility Criteria for Plant and Machinery Loans

To be eligible for a plant and machinery loan, businesses typically need to meet certain criteria. Here are some of the most common requirements:

Good Credit Score

Lenders typically require borrowers to have a good credit score to qualify for a loan. A credit score is a numerical representation of a borrower's creditworthiness, based on their credit history. A higher score indicates a lower risk of default, which makes the borrower more attractive to lenders.

Stable Financial History

Lenders also look for businesses with a stable financial history, including a consistent track record of revenue and profits. This helps lenders assess the borrower's ability to repay the loan.

Business Plan (for new starts)

If your business has been trading for less than 3 years, you will be classed as a new start business. In this case, lenders may also require a detailed business plan that outlines the borrower's goals, strategies, and financial projections. The lender may also require Personal Guarantees & Indemnities from the business owners and directors in order to get comfortable to lend to the business.

This helps lenders assess the borrower's ability to generate revenue and repay the loan.

Business Plan (for new starts)

If your business has been trading for less than 3 years, you will be classed as a new start business. In this case, lenders may also require a detailed business plan that outlines the borrower's goals, strategies, and financial projections. The lender may also require Personal Guarantees & Indemnities from the business owners and directors in order to get comfortable to lend to the business.

This helps lenders assess the borrower's ability to generate revenue and repay the loan.

Documents Required for Plant and Machinery Loans

To apply for a plant and machinery loan, businesses typically need to provide certain documents. Here are some of the most common requirements:

Accounts

Lenders typically require borrowers to provide financial year end accounts and management accounts. These documents help lenders assess the borrower's financial stability and ability to repay the loan.

Bank Statements

Lenders typically require the last 3 or 6 months business bank statements in order to assess serviceability for the lend being requested. Most lenders will require copy statements, but some will have the ability to get these via Open Banking.

Valuation Reports

In order for lender to assess your application, they need to assess how much the asset is worth. The value will be based on the sales price as well as the market price. Lenders will not lend more than an asset is worth, so if you are purchasing at inflated prices, then lenders will not fund the full amount.

When purchasing used plant equipment or machinery, the lender will request a valuation report before deciding on the application. Most lenders will have their own valuation team or will use their own approved valuation partners.

How to Apply for a Plant and Machinery Loan

To apply for a plant and machinery finance facility, businesses should follow these steps:

1. Research lenders and compare rates, repayment terms, and service (some lenders may be cheaper, but this isn't always the best option)
2. Gather all necessary supporting documents
3. Complete the finance application and provide all required information
4. Wait for the application decision
5. If approved, review the finance agreement carefully and sign it
6. Use the funds to acquire the plant and machinery you need to grow your business

Repayment Options for Plant and Machinery Loans

There are several repayment options available for plant and machinery Loans. Here are some of the most common options:

Fixed Monthly Payments

Fixed monthly payments are the most common repayment option for plant and machinery loans. This option allows borrowers to make a consistent payment each month, which can help with budgeting and financial planning.

Variable Monthly Payments

Variable Monthly Repayments are available and may be the best option to get the lowest interest rate, however, the repayments can change throughout the agreement, both susceptible to going up and down.

Balloon Payments

Balloon payments are larger payments due at the end of the loan term. This option can lower the regular monthly payments but can also result in higher total interest paid over the life of the loan.

Seasonal Payments

Seasonal payments allow borrowers to make larger payments during their busiest season and smaller payments during their slower season. This can help businesses manage cash flow and avoid defaulting on the loan.

Risks Associated with Plant and Machinery Loans

While plant and machinery loans can provide many benefits, they also carry some risks. Here are some of the most common risks:

Defaulting on the Loan

If a borrower is unable to make the required payments, they risk defaulting on the loan. This can result in the loss of collateral, damage to their credit score, and legal action. The equipment can also be repossessed.

Depreciation of Equipment

Plant and machinery can depreciate quickly, which means its value may decrease faster than the borrower can repay the finance agreement. This can leave the borrower with a large debt and a piece of equipment that is no longer worth its original value. This is rare as the lender will always try to avoid this being the case prior to agreeing the loan, but market conditions can change during the agreement.

Conclusion: Why Plant and Machinery Loans are a Smart Investment

Investing in plant and machinery is a smart move for businesses looking to grow and improve their operations. By securing a plant and machinery loan, businesses can acquire the equipment they need to enhance productivity, increase capacity and improve safety and compliance. However, before taking a loan, businesses should consider the risks and benefits and carefully review all terms and conditions. With the right approach, plant and machinery loans can be a valuable tool for unlocking your full potential and achieving long-term success.

Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.