Nic Redfern
Holly Bennett
Asset finance can help businesses spread the cost of buying or hiring equipment, vehicles, machinery and more over time. This can free up working capital, or it can just mean you secure essential equipment your business doesn’t have the money to buy outright, or you would just prefer to spread over a longer term.
In 2021, asset financing provided £20 billion of new finance to UK small and medium-sized enterprises (SMEs). We explain how to navigate and weigh up the options available to your business.
Asset finance meaning
Asset finance is a loan a business takes out that helps it pay for high-value assets, such as machinery, company cars or office equipment. It’s most often used when a business wants to grow but doesn’t have the ready cash to buy those vital assets up front, or would rather spread the cost over time.
How asset finance works
You can take out asset finance through a finance provider, an equipment provider or manufacturer, or through a broker.
If you’re looking for a new physical asset, like machinery or vehicles, a leasing company would usually buy and own the equipment on your behalf, and your business would effectively rent or hire the use of it over a set period, according to a pre-agreed contract.
Like any business loan application, you’ll need to show that your business will be able to afford to make the agreed payments, and your credit rating will 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.
Depending on the type of asset financing, your business may eventually own that asset at the end of the agreement, buy it for a small fee, continue to lease, upgrade it or hand it back.
What types of assets can I finance?
An asset is an object or resource that has a value and helps a business deliver their purpose, achieve growth, or generate an income. That could be anything from an office chair to a heavy goods vehicle.
There are two main types of asset:
- Hard assets are physical, high-value items, including vehicles, such as company cars, tractors and machinery, engineering and manufacturing equipment, and even buildings and premises.
- 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.
You can use asset finance to buy, lease, or borrow against a number of high-value items. Asset finance companies will want to know that the asset is:
- durable
- identifiable
- moveable
- saleable
What are the different types of asset finance?
There is a lot of choice for leasing and hire purchase, and some options will suit the asset you’re looking for more than others.
Hire purchase
This lets you buy an asset by spreading the cost over an agreed term. The item appears on your balance sheet and the insurance and maintenance are your responsibility. Once the term ends, the asset is yours.
Contract hire
Also called vehicle asset finance, this is just for company vehicles. A lender buys the vehicle 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 disposal of the vehicle at the end of the leasing period.
Equipment leasing
With this type of asset finance, the 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.
You’ll usually need to pay the first month’s rent up front, with the rest of the balance spread over the lease period. At the end of the term, you may be able to continue to lease the equipment, buy it, or just hand it back. It’s especially popular for companies having to adapt to rapid change that may struggle to form medium-term financial projections.
Operating leasing
This is a rental agreement with a set term, where you won’t pay for the full cost of the asset, which is often specialist machinery, as you’re renting it for a period shorter than its economic life.
It’s often cheaper than equipment leasing, as the business only pays the calculated value of the item over the limited lease period agreed. The leasing company is responsible for maintenance and will take the asset back at the end of the agreement.
Finance leasing
Also known as a capital lease, this is a long-term lease designed for an asset’s lifetime. You get full use of the asset and pay it off over time, and you’re responsible for maintenance and insurance.
The payments generally last until the finance provider has recouped at least 90% of the asset’s purchase value. The lender may let you share a percentage of the value once the item has been sold, but your business won’t have the option of buying the asset outright.
Asset refinance
This option is a bit different, as you secure a loan against an asset your business already owns, which might be a vehicle, piece of equipment or even business premises, to release the cash your business needs. With asset refinance, lenders will base their offer on the equity you hold in that asset. This means that, unlike a business loan, you can 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 depends on the value of the asset you’re unlocking cash from.
Once the refinancing has been agreed, you pay the 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 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, instead of paying a large lump sum payment in one go, is likely to be the main benefit. But there are other advantages:
- You’ll have minimal upfront 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, so take time to consider if it 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, leaving you with the option of paying for it or taking out insurance to cover it.
- 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, which may affect your credit report, if to many searches are done in a short space of time.
How long can I have asset finance for?
It will usually depend on the asset’s operational lifetime, especially if you’re securing specialist equipment. It tends to be 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 regulated?
Business asset finance isn’t regulated by the Financial Conduct Authority (FCA), but the FCA covers financial services providers for certain regulated activities, including car hire purchase, and many lenders are authorised and regulated by the FCA.
The Finance and Leasing Association (FLA), a trade association for UK asset, consumer and motor finance sectors, has statements of recommended practice relating to leasing and asset finance.
Is asset finance right for my business?
It depends on your type of business and the assets you want to fund. But if your business needs the latest machinery, vehicles or technology, which might otherwise be out of reach, or would just rather spread the cost over time, it may be an alternative to a bank loan, for example.
You’ll want to consider how long the contract is, what happens to the asset at the end of the contract, and 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. It’s also worth being aware of the pros and cons of the specific type of 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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