Education

What is asset finance and how does it work?

1 Dec 2022

As a business owner, you might require additional funding to pay staff, foot a bill, purchase machinery, buy more stock – or something else entirely. Commercial asset finance is a flexible type of funding that can provide you with a working capital boost. It can also help you spread the cost of the equipment or machinery your business needs.

Crane

Property, vehicles, equipment and inventory are examples of the assets you might use to facilitate your day to day operations. But did you know that you can also use your assets to secure finance, and use finance to secure the assets you need to run effectively?

Asset finance is a broad term that falls into two main categories. 

The first is called asset refinancing. This is when you use the value of the assets you already own as security against a business loan. The second type enables you to acquire an asset without having to buy it outright by spreading the cost or leasing it.

Refinancing existing assets 

Asset refinancing is when you use the assets on your balance sheet as security against a business loan. For example, if you run a delivery business you might use your fleet to secure working capital finance. Or if you’re a farmer you could use your land to secure finance to fund a piece of agricultural machinery. 

Then there’s asset-based lending.  

This variety of asset refinance is also known as sale and hire purchase back. It’s when you sell your asset to a finance company for an agreed sum before leasing the asset from them. It’s a way for you to gain access to a large amount of cash that’s paid back in instalments over time. Plus, you still get to use the asset to run your business.  

Benefits of asset refinance:

  • Often more accessible than bank business loans

  • Repayments and interest rates are usually fixed, making budgeting simpler

  • You’ll only lose the asset if you don’t repay the loan

Drawbacks of asset refinance:

  • The loss of the asset (if you don’t repay) could harm your business

  • If the asset valuation is low, you won’t get as much cash

  • Asset refinance isn’t a suitable long-term funding option

Using finance to access new assets 

Asset finance also means financing the purchase (or leasing) of an asset. Asset finance and leasing can be used to acquire vehicles, heavy machinery, commercial kitchen equipment, office furniture - you name it, you can probably hire or lease it. 

You might take out asset finance if you can’t afford to buy outright what you need to run your business. You may also use it if you don’t want to pay a big cash sum and would rather make smaller payments over an agreed period. (Remember that you’ll have to pay fees and interest too.)

Within this category, there are four main types of asset finance to explore.

1. Hire Purchase

If you want to own the asset after you’ve paid it off, hire purchase could be the asset finance type for you. Once you’ve met the repayments the asset is yours to keep. 

It’s likely that the asset will be a positive item on your balance sheet from the start of the term, however the finance provider will own the asset until you’ve paid it off. You’re responsible for maintaining it and you can’t sell the asset until the term has ended, or, if the finance allows, if you’ve settled the contract early. 

Hire purchase with a balloon Payment (Business Contract Purchase)

Hire Purchase has a variant where the monthly payments can be reduced so they only cover the interest on the loan, and the final (or ‘balloon’) payment is used to repay the loan. This means the monthly repayments are lower, but the total cost of credit is higher.  

2. Finance Leasing

If you opt for a finance lease the finance provider will purchase the asset and rent it to you. You’ll make monthly repayments until you’ve covered the cost of the asset (plus the interest). You’ll also be responsible for insurance and maintenance.

You’ve got three options at the end of the term:

  • Carry on renting the asset

  • Return the asset 

  • Sell the asset on behalf of the finance provider 

3. Operating Lease

Perhaps you only need an asset for a specific period of time?

If this is the case an operating lease might be the most suitable form of asset finance to explore. You can take out an operating lease on equipment for a set duration and even upgrade to a newer model, sometimes within the rental period. 

Unlike a finance lease, the finance provider is responsible for the asset’s maintenance throughout the finance agreement.

4. Contract Hire

Do you rely on fleets? Contract hire relates to leasing vehicles. Acquiring and maintaining fleets can be very time-consuming; with contract hire, the provider sources and maintains the vehicles and you make regular payments over a set lease term. 

Benefits of asset finance

  • Small or no upfront costs 

  • The value of the asset is spread over the term 

  • The asset acts as collateral for the finance

  • Maintenance is often – but not always – handled by the provider

  • Freed up capital can be used to fund other things

Drawbacks of asset finance

  • You may never own the asset

  • The asset will be repossessed if you don’t repay

  • The minimum term is usually one year or more 

  • You may be liable for damage

  • There may be a limit on the usage, e.g. mileage for vehicles 

Asset finance UK: How Funding Options can help

Funding Options can match you with the best asset finance solutions for your needs. We’ll guide you through the application process and make sure you get the best deal. 

Whether you’re looking for asset backed finance to ease cash flow or a lease option to hire equipment for your growing business, start your funding journey with us today.

Find SME asset finance

Vivek Seda

Vivek Seda

Asset Lending & Property Team Lead

Vivek Seda is the Asset Based Lending & Property Team Lead at Funding Options. Vivek has been in the commercial finance industry for over five years, helping SMEs in the UK access over £40m of funding in that time. He also supports the business on working on corporate finance and structured transactions successfully funding Acquisitions and MBOs for businesses.

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