Nic Redfern
George Harrison
Asset finance is a way for businesses to gain access to useful equipment – or assets – without having to pay the full cost of the equipment up front. Instead of buying equipment such as expensive machinery or vehicles outright, asset finance also allows businesses to spread the cost by leasing or hiring the equipment in question.
Asset finance can therefore help by freeing up much-needed working capital for your business. It can also help your business secure access to essential or cutting-edge equipment, machinery, or vehicles, which your business may not otherwise have been able to afford.
In 2022, almost a third of UK investment in machinery, equipment and software came as a result of asset finance. In the same year, the business sector and public services received £34 billion of asset financing.
What is asset finance?
Asset finance is a form of loan taken out by a business to help pay for business-critical assets. Asset finance is versatile, and it could be used for many items, including machinery, company cars or office equipment.
Asset finance is most often used when a business doesn’t have the ready cash to buy vital assets up front. Alternatively, businesses may use asset finance because they would rather spread the cost of expensive equipment over time. This can help with cash flow without compromising the ability of the business to grow.
How does asset finance work?
If your business uses asset finance to acquire a physical asset, such as machinery or vehicles, the finance provider will generally buy the equipment on your behalf. This means the finance provider technically owns the equipment.
Your business would then rent or hire the equipment from the finance provider. This means your business will be able to use the equipment according to the terms of a pre-agreed contract – without having to pay for the equipment up front.
Like any business loan application, to take advantage of asset finance you’ll need to show that your business can afford the agreed leasing or rental payments. Your credit rating may also be taken into account.
The lease agreement is usually at a fixed interest rate, and the loan is paid back to the lender in regular instalments, over a set period of time.
What happens at the end of the lease period depends on the asset finance agreement. It may be possible for your business to continue renting the asset, or else you may be able to return the asset and cease the regular lease payments. If your business has a hire purchase agreement, your business may become the outright owner of the asset at the end of the leasing period.
Whatever kind of asset finance you’re looking for, you can take out asset finance through a finance provider, an equipment provider or manufacturer, or through a broker.
What is an asset?
An asset is an object or resource that has a value and helps a business deliver its purpose, achieve growth or generate an income. That could be anything from an office chair to a heavy goods vehicle.
What types of assets can I finance?
Asset finance companies generally use something called the ‘DIMS’ model when determining what counts as a finance-worthy asset. This simply means that lenders want to know that the asset in question is Durable, Identifiable, Moveable and Saleable.
There are two main types of asset:
- Hard assets are physical, high-value items, including vehicles, machinery, and engineering and manufacturing equipment.
- Soft assets are less durable assets, including IT hardware, software packages, catering equipment, office furniture and security systems, which may have little saleable value by the end of the finance agreement.
Hard assets – such as machinery, equipment and vehicles – are most commonly used in asset finance agreements. While you may also be able to find lenders to finance soft asset purchases, lenders generally prefer to finance hard assets.
What are the different types of asset finance?
There are several different types of asset finance. While many of the different asset finance agreements work in similar ways, it’s important that you read up on the various options. Choose the one that will best suit your business and help you achieve your specific aims.
Hire purchase
Hire purchase lets you buy an asset by spreading the cost over an agreed term. With a hire purchase, it is your responsibility to insure and maintain the asset. At the end of the agreed term, the asset becomes yours.
Contract hire
Also called vehicle asset finance, contract hire is a form of asset finance for company vehicles. A lender buys the vehicle (or fleet of vehicles) your business needs, and you pay them back in instalments over an agreed lease period. Servicing costs and maintenance are the lender’s responsibility, as is the disposal of the vehicle at the end of the leasing period.
Equipment leasing
With equipment leasing, the asset finance provider buys the asset your business needs and rents it out to you. The provider takes care of maintenance and servicing costs. You pay only a fraction of the total value up front, which might be ideal if you need high-quality and expensive manufacturing machinery but don’t have the funds to buy it outright.
Operating leasing
An operating lease allows a business to secure an asset for a specified period of time. Under an operating lease, the finance provider is responsible for maintaining the asset for as long as it is being leased out. During this period, the leasing business may also be able to upgrade the asset to a more advanced model, if permitted in the lease agreement.
Finance leasing
With a finance lease, a finance provider will buy an asset you need and lend it to your business. Throughout the duration of the lease, your business will make monthly repayments to cover the cost of the asset, plus interest. Your business will be responsible for maintaining the asset.
At the end of a finance lease term, you will be able to choose whether to continue renting the asset, return the asset to the finance provider, or facilitate the sale of the asset – potentially making money for your business.
What is asset refinancing?
Although they sound similar, asset finance is not to be confused with asset refinancing.
With asset refinancing, your business can secure a loan against an asset your business already owns. This asset might be a vehicle or a piece of critical equipment.
The benefit of asset refinancing is that it allows a business to quickly release some of the cash tied up in its assets. This may be useful to cover an unexpected cost, for example.
With asset refinancing, lenders will offer to lend you money based on the equity you hold in that asset. This means that, unlike with a business loan, asset refinancing allows you to unlock cash from physical assets you only partly own.
The asset you’re refinancing must be physically removable to be considered security for your loan. How much you can borrow will depend on the value of the asset you’re unlocking cash from.
Once the refinancing has been agreed, your business will pay back the finance provider in instalments over an agreed period, with interest on the loan. If you can’t keep up payments on the loan, the lender will reclaim the refinanced asset to get back what is owed.
What are the advantages of asset finance?
For a business, being able to spread the cost of a high-value item over time is likely to be the main benefit of asset finance. Other advantages include:
- Reduced up-front costs for high-value items.
- Payments are fixed, which helps long-term budgeting.
- The lender may take care of expensive servicing and maintenance.
- The risk of depreciation and the responsibility for replacing the item if it stops working before the end of the term may fall to the provider.
- You can use crucial business capital you would spend on the asset elsewhere.
- It’s an alternative to other typically higher-interest forms of lending, such as overdrafts and bank loans.
- You can mostly access leasing and hire purchase whatever your sector, location, size or age of the business.
What are the disadvantages of asset finance?
Asset finance isn’t always the best solution for a business. As with any major business decision, take time to consider whether asset finance suits your company’s financial situation before you sign an agreement. And bear the following in mind:
- Damage that isn’t covered by maintenance or servicing may not be covered under your finance agreement.
- If you miss a payment or default on the loan, the equipment may be taken back by the lender. This could cause problems if it is crucial to your business operations.
- Leasing finance or a hire contract may mean you pay for an item you’ll never end up owning.
- It isn’t a short-term solution, as most asset finance providers won’t consider terms of less than a year.
- It can be more expensive, long-term, than buying an asset outright, and you may have to make a deposit or advance payment.
- The provider will carry out credit checks when you apply for finance. This may affect your credit report, if too many searches are done in a short space of time.
How long can I use asset finance for?
How long you can use asset finance will usually depend on the asset’s operational lifetime, especially if you’re securing specialist equipment. Asset finance agreements tend to last for between one and seven years, but the provider may offer shorter or longer terms.
How much asset finance could I get?
While it depends on the lender, it’s possible to secure a lease for as little as £1,000. The most expensive agreement you’re likely to find will be around £10 million. The lender will need to be satisfied that your business can afford the repayments before they approve the purchase or loan, and bear in mind that sometimes your business will need to have a minimum annual turnover.
Is asset finance right for my business?
Whether asset finance is right for your business or not is likely to depend on your type of business and the assets you want to fund. But if your business needs the latest machinery, vehicles or technology and would rather spread the cost over time, asset finance may be a viable alternative to other forms of funding – like a bank loan.
If you are thinking about using asset finance for your business, then consider the length of your contract and what happens to the asset at the end of it. It’s also important to make sure that the repayments won’t put stress on your working capital.
Like most business funding options, you’ll need to make sure you can make the regular repayments on time and show evidence of that to the lender when you apply for asset finance. It’s also worth being aware of the pros and cons of the specific type of asset finance agreement you’re choosing.
Once you have a loan amount and term in mind, you’ll be in a position to compare providers and rates, whether you’re going through a broker or directly with a lender.
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