Capex Loans for MSMEs: How to Finance Machinery, Equipment, and Plant Expansion Without Pledging Your Home

When a micro, small, or medium business wins a huge order from a credible buyer, the only thing stopping it from fulfilling that order is limited machinery, equipment, or plants. This requires funding, which the business usually acquires by pledging a home as collateral or security for the loan. This traditional financing method has become so regularly used that most MSME owners in India forget to ask if it has any alternatives. 

For every MSME, growth requires capital, getting capital requires security, and the most obvious security a small manufacturer owns is the home where their family resides. However, financing machinery, equipment, and plant expansion is possible without pledging your home. A capex loan for MSME is an excellent way to get the funding required for increasing operational scope and gaining future economic benefits. 

This blog discusses what capex or capital expenditure financing is, who commonly borrows it, how you can be eligible for it, and how you can expand your capacity without turning the place you live into collateral. 

What is a Capex Loan?

Capex or capital expenditure refers to the funds used by the company for acquiring or upgrading assets that deliver better value in the coming years. These assets can include machinery, factory buildings, equipment, or tools. A capex loan is the business financing solution that facilitates this upgrade. So, companies get to grow without draining their liquid cash.

Many people confuse a capex loan with a working capital loan, but there’s a distinction between the two. To explain it simply, a working capital loan is used to fund day-to-day operational costs like payroll and inventory. A capex loan for MSMEs finances long-term investments like buying the following: 

• Factory machinery
• Heavy equipment 
• Commercial real estate
• Building updates
• Business vehicles/delivery fleets 
• IT hardware systems 
• IT software systems

Key Features of Capex Loan 

Here are the key features of a capex loan that every MSME should know about before they compare the different capex loan lenders available: 

• Capex Loans are Purpose-Specific: 

In capital expenditure (capex) loans, the money is sent directly to the vendor or supplier based on the proforma or the final invoice of the machinery, equipment, or system you wish to invest in. By doing this, the lender is able to ensure that the buyer doesn’t use the funds for any other need. 

Here’s how the disbursement works: 

• The lender verifies the vendor or supplier and checks the invoice or proforma. 
• Money is sent by the lender directly to the bank account of the seller. 
• Once the seller gets paid, the MSME receives the machinery or equipment. 

The cash doesn’t get deposited into the operating account of the MSME at any point in the process.

• Repayment of Capex Loans: 

Typically, a capex loan is paid back to the lender in the form of regular installments, either monthly or quarterly. The repayment tenure lasts for a medium-to-long time of 3 to 10 years. This timeline aligns with the useful life of the asset that is being financed through the capital expenditure loan. 

• Asset-Secured Collateral: 

While there’s no need to have traditional collateral for a capex loan (like your home), the loan for equipment is asset-secured. The financed equipment is hypothecated to the lender, serving as the primary security. Hypothecation in capex loans refers to the scenario in which the MSME keeps possession of and uses the equipment, but the lender holds legal claim over it. This is where the default risk comes into the picture. If you fail to pay your due installments, the lender has the right to seize the equipment. 

• Partial Financing by Lender: 

Capex loans are different from typical loans because the lender doesn’t fund 100% of the capital expenditure. Only a set percentage of the asset cost is paid by the lender, and the remaining balance needs to be paid by the borrower. This is called the margin money contribution. In ideal scenarios, the lenders fund 70% to 80% of the project or asset cost, and the borrower is required to arrange the remaining  20% to 30% from their own funds before capex loan disbursal. 

• Depreciation and Interest Benefits: 

One of the top benefits of capex loans is that it provides MSMEs with a dual tax shield, thereby reducing their taxable income. Firstly, the interest paid on a capex loan is a tax-deductible business expense. Secondly, the purchased asset qualifies for depreciation deductions. The result is that the true net post-tax cost of borrowing is lowered. 

The Different Routes to Machinery Finance Without Property Collateral

Securing machinery finance without property collateral is possible through the following ways: 

• Using the equipment itself as hypothecation
• Leveraging government-backed credit guarantee schemes like CGTMSE
• Applying for unsecured business and equipment loans via specialized NBFCs
• Renting the machinery over a fixed term via a finance lease
• Selling an existing tool or asset to free up liquid cash

Challenges Associated With Capital Expenditure

Capital expenditure is known to support long-term growth of MSMEs. However, there are several financial and operational challenges associated with it. These include: 

• Companies are required to estimate future demand and capacity requirements accurately before investing in new assets. If this is not done, the assets may remain unused, or the production capacity may become insufficient. 
• Even before the full cost of the investment is recovered, the machinery or technology for which capital expenditure was incurred may become outdated. 
• Capex loans require a monthly or quarterly repayment. However, if a company is not able to balance this expense with salaries, working capital, and other debt repayments or financial commitments, it may quickly end up in financial strain. 
• Measuring the ROI from such assets may also be difficult for some businesses. 

It is not very difficult for a business to overcome these challenges; you just need the right approach and strategic thinking. When compared against the fact that a capex loan for MSMEs doesn’t require pledging a home as security or collateral, these challenges can be handled. 

Fund Expansion and Equipment Purchases With Machinery Capex Financing from Credlix 

Credlix offers machinery and equipment capital expenditure financing for MSMEs, allowing them to boost their capacity without pledging their home. Whether you want to fund plant expansion, automation, or imported equipment, we offer loans of up to ₹10 crores. Being an RBI-licensed NBFC platform, Credlix is trusted by more than 2,500 enterprises and MSMEs. 

At Credlix, the approval timeline is a maximum of 48 hours, and the process is 100% digital. Business owners need to submit the machinery quote to our team, after which we will conduct a credit and technical evaluation, followed by which your capex loan is sanctioned. The next step is vendor payment, after which your flexible EMI structure comes into effect. Say goodbye to high upfront costs and slow bank bureaucracy when you get a capex loan from Credlix. 

FAQs

Can an MSME really get a machinery loan without pledging property?

Yes, an MSME can get a machinery loan without collateral if they opt for a capital expenditure loan. In this case, the financed equipment itself serves as the primary security through hypothecation. Other methods include government credit schemes like CGTMSE, finance leases, and unsecured facilities from specialized NBFCs. 

What is the difference between a capex loan and a working capital loan?

A working capital loan funds day-to-day operations, while a capital expenditure loan funds a business’s long-term assets. The key difference between the two lies in the tenure and repayment. While working capital loans are structured as short-term or revolving facilities, capex loans are structured as a long-term loan.

How long does capex loan approval take?

The time required for capex loan approval depends on the lender. When you apply for a loan from a traditional bank, several weeks are spent before the loan is finally sanctioned. However, if you choose Credlix, the machinery capex financing is approved within 48 hours of receiving the quote, depending on the credit and technical evaluation.