Term Loan vs Equipment Finance vs Leasing for Machinery
Term loan vs equipment finance: a term loan funds machinery and other capex but usually needs a bigger margin and sometimes collateral, while equipment finance is secured mainly on the machine and often needs less money down. A lease avoids ownership. As of November 2026, RBI's repo rate is 5.50%, so floating rate loans are resetting higher.
For many Indian businesses, Diwali week is a traditional time to order new machinery. A packaging unit adds a second line, a contractor buys an excavator, a clinic upgrades its diagnostic equipment. The machine is usually the easy decision. The harder one is how to pay for it: a bank term loan, an equipment finance loan secured on the machine, or a lease where you never own the asset at all.
The choice matters more this season. RBI raised the repo rate by 25 basis points to 5.50% on 7 October 2026 and said rate cuts are off the table in the near term. Floating rate loans linked to the repo rate are now resetting upward. This guide compares the three routes side by side, shows the rupee difference on one machine, and explains how lenders look at each.
Term loan vs equipment finance vs leasing: the short answer
A term loan is a fixed-tenure loan from a bank or NBFC that you repay in instalments, often covering machinery and other project costs together. Equipment finance is a loan for one specific asset, secured mainly by that asset, which often funds a higher share of its cost. A lease lets you use the machine for a fixed rental while the lessor owns it.
| Term loan | Equipment finance | Lease | |
|---|---|---|---|
| Who owns the machine | You, with the lender's charge on it | You, with the asset hypothecated to the financier | The lessor |
| What it can fund | Machinery, civil work, installation and other capex in one loan | Usually one identified machine or vehicle | Use of one identified asset |
| Your upfront money | A margin you fund yourself, set by the lender | Often a smaller margin, set by the financier | Usually a security deposit or advance rentals |
| Main security | The machine plus, often, other business assets or collateral | Mainly the machine | The lessor keeps ownership |
| Typical providers | Banks and NBFCs | Banks, NBFCs and manufacturer-linked financiers | Leasing companies and NBFCs |
| Best fit | Larger capex plans with several cost heads | A single machine you want to own with less money down | Assets you may replace, upgrade or return |
| Product on our site | Capex finance | Capex finance | Not a lending product |
Each lender sets its own margin, rate, tenor and security after its own credit assessment. None of the figures in this guide are loan terms.
How a term loan for machinery works
A term loan is the standard bank route for capex. The lender studies your business first: revenue, profit, existing borrowings, repayment record and projected cash flow after the new machine starts working. It then sizes the loan against the project cost, minus the margin you bring in yourself.
Three points decide whether a term loan suits you:
- Several cost heads. A term loan can cover the machine, foundation work, electrical upgrades and installation together. That keeps the whole project under one sanction.
- Collateral. Under RBI's Master Direction on Lending to MSMEs, as amended on 9 February 2026, banks must not accept collateral security for loans up to ₹20 lakh to micro and small enterprises, for loans sanctioned or renewed from 1 April 2026. Banks may extend this to ₹25 lakh based on the unit's track record and financial position. The machine itself is still the primary security. Larger loans often need extra collateral, such as property, or a guarantee cover. Our guide to MSME loans without collateral explains the credit guarantee route.
- Rate type. Under RBI's Master Direction on Interest Rate on Advances, updated as on 1 October 2025, floating rate bank loans to micro and small enterprises must be linked to an external benchmark such as the repo rate, and that rate must reset at least once in three months. Fixed rate loans are priced differently.
Lenders also check debt service cover: whether the cash the business generates covers the instalments with room to spare. Our guide to DSCR shows the calculation.
How equipment finance works
Equipment finance is a loan built around one asset. The financier hypothecates the machine, which means it holds a charge on it until you repay, and you own it from day one. Because the asset is the main security, the financier studies the machine as closely as your accounts.
What it looks at:
- The asset's resale value. Standard, widely used machines such as earthmoving equipment, commercial vehicles or common production machinery are easier to finance, because the financier can sell them if needed.
- The supplier. A proforma invoice from an established dealer or manufacturer, with the model, specifications and warranty.
- Your use case. Contracts, orders or utilisation plans that show the machine will earn its instalments.
- Your record. Repayment history on earlier loans and your credit score.
Equipment finance often needs less money down than a general term loan, and the process is usually narrower because it covers one asset. The trade-off can be a higher rate, as our worked example shows. Our earlier guide to capex and equipment loans for MSMEs covers credit guarantees for machinery loans in more detail.
How leasing works
In a lease, a leasing company or NBFC buys the machine and you pay a rental to use it for an agreed period. At the end, you return it, renew the lease or, where the contract allows, buy it. You do not own the machine during the lease.
There are two broad kinds:
- Operating lease. A shorter rental where the lessor keeps most of the risks of ownership, including what the machine is worth at the end. Useful for technology that ages fast or for a project with a fixed end date.
- Finance lease. A longer lease that covers most of the asset's life. Economically it looks much like a loan, even though the lessor holds title.
Leasing does not always stay off your balance sheet. Under Ind AS 116, notified by the Ministry of Corporate Affairs on 30 March 2019 and in force from 1 April 2019, a lessee recognises a right-of-use asset and a lease liability for most leases. The exemptions are short-term leases of 12 months or less and leases of low-value assets. Companies that follow Ind AS should expect lenders to read most leases much like debt. Smaller companies that do not follow Ind AS use the older lease standard, under which operating lease rentals are shown as an expense.
Worked example: one ₹50 lakh machine, three routes
Illustrative example, assuming a ₹50 lakh machine over 5 years: a term loan funding 75% at 10.5% a year; equipment finance funding 90% at 12% a year; or a lease at an assumed rental of ₹1,10,000 a month with three months' rental as a refundable deposit. These rates and the rental are assumptions, not market quotes, and the figures exclude GST, fees and tax effects.
| Term loan | Equipment finance | Lease | |
|---|---|---|---|
| Amount funded | ₹37.5 lakh | ₹45 lakh | Full use of the machine |
| Your money upfront | ₹12.5 lakh margin | ₹5 lakh margin | ₹3.3 lakh refundable deposit |
| Monthly outgo | about ₹80,602 | about ₹1,00,100 | ₹1,10,000 |
| Total paid over 5 years, including your margin | about ₹60.86 lakh | about ₹65.06 lakh | ₹66 lakh in rentals |
| Interest within that | about ₹10.86 lakh | about ₹15.06 lakh | Not separately stated |
| Who owns the machine after 5 years | You | You | The lessor, unless you buy it |
In this example, the term loan costs the least in total but ties up ₹12.5 lakh of your own cash today. Equipment finance releases ₹7.5 lakh of that cash for working capital, at an extra cost of about ₹4.2 lakh over five years. The lease needs the least cash upfront, but at the end you have paid ₹66 lakh and own nothing, so it only makes sense if you plan to return or upgrade the machine.
The right answer depends on what that released cash earns in your business. If ₹7.5 lakh of extra working capital lets you take on orders you would otherwise turn down, paying more for equipment finance can be the better choice.
What the October repo hike means for your machinery loan
RBI's Monetary Policy Committee raised the policy repo rate from 5.25% to 5.50% on 7 October 2026 and changed its stance to calibrated tightening. It said policy action ahead "can only be a rate hike or a pause". Its next meeting is from 2 to 4 December 2026.
For a floating rate loan linked to the repo rate, the higher rate reaches your instalment at the next reset. Illustrative example, assuming the ₹37.5 lakh term loan above moves from 10.5% to 10.75% for its full 5-year term: the monthly instalment rises from about ₹80,602 to about ₹81,067, or about ₹5,582 a year. That is small on one machine, but it is the direction that matters. A fixed rate loan or a lease rental locks the cost for the term, usually at a price set at the start. Ask each lender whether the rate is fixed or floating, what benchmark it follows, and when it resets. Our guide to how MCLR, EBLR and repo set your rate explains the benchmarks.
The tax point: buying near Diwali and the 180-day rule
Depreciation goes to the owner of the machine. With a term loan or equipment finance, that is you. With an operating lease, the lessor generally claims it and you claim the rental as a business expense. Your tax adviser should confirm the treatment for your contract.
Timing also matters. Under section 33(4) of the Income-tax Act, 2025, depreciation is restricted to half the prescribed rate for an asset acquired during the tax year and put to use for less than 180 days in that year. A machine put to use on 6 November 2026 will have been in use for 146 days by 31 March 2027, so it falls under the half-rate rule for tax year 2026-27, whichever way you fund it. The unclaimed value carries forward into later years' depreciation. Do not let a tax date rush a funding decision.
GST is charged on lease rentals and on the purchase of a machine. Whether you can take input tax credit depends on the asset and your business, so check this with your tax adviser before comparing costs.
Which route fits your business
| If your situation is this | Consider |
|---|---|
| A large expansion with civil work, several machines and installation | A term loan, possibly with a moratorium until the machines start earning |
| One standard machine you plan to use for many years, and cash is tight | Equipment finance |
| Technology that ages fast, or a contract with a fixed end date | An operating lease |
| Loan up to ₹20 lakh for a micro or small enterprise | A bank loan where collateral security cannot be demanded under RBI rules |
| You expect rates to rise further and want a fixed cost | Compare fixed rate equipment finance and lease rentals against a floating rate term loan |
Whatever you choose, keep your machinery funding separate from your working capital limit. Using a cash credit limit to pay for a machine squeezes the cash you need for stock and receivables. Our guide to working capital vs term loans explains why lenders keep the two apart.
A checklist before you approach lenders
- Proforma invoice from the dealer or manufacturer, with model, price, delivery date and warranty.
- Project note: what the machine adds, expected output, new orders and the date it will start working.
- Financials: three years of audited accounts, current year provisional figures and GST returns.
- Existing loan schedule with every instalment you already pay.
- Udyam registration, if you are an MSME, so the lender can apply MSME rules.
- Collateral details, if the loan is above the collateral-free limit.
- Two or three quotes across a term loan, equipment finance and a lease, each showing rate type, upfront money, fees and total outgo.
How MoneyKarma helps
MoneyKarma is a loan distribution platform for Indian businesses and real estate developers, with 90+ lenders. Not a lender. We help businesses compare machinery funding through capex finance from public sector banks, private banks, NBFCs and financial institutions, including loan amount, margin, rate type, tenor and security. Every credit decision, limit and rate is set by the lender. Our team responds within 24 hours on average, with ₹2,500+ Cr facilitated to date. Apply here to start.
This guide is general information, not financial, legal, tax or accounting advice. Rules are as notified up to 4 November 2026. Illustrative examples are not loan offers. Confirm current terms with your lender and tax treatment with your adviser.