Asset finance is a type of lending that enables you to access business assets such as equipment, machinery and vehicles without having to buy them upfront. It can also allow you to release cash from the value in assets you already own or use your existing assets as security against a business loan from an asset finance lender.
Business asset finance is typically attractive to businesses who want to put their growth plans into action but don’t necessarily have the ready cash, or business owners who would rather spread large costs over a longer period.
Short-term asset finance also enables businesses to remain competitive by making it easier for them to access the latest technology. Asset finance is a broad category that relates to valuable items in your business.
Generally speaking there are two types of asset finance — lending secured against existing assets, and equipment finance to get additional assets.
Depending on the type of asset finance, the borrower can eventually take on full ownership of the asset, return it to the lender or lease a newer version.
Asset finance includes:
An ‘asset’ can be almost anything, whether it’s ovens and refrigeration for a catering company or a haulage firm’s fleet of vehicles — and with a wide choice of alternative lenders across the market, you can find asset finance for almost anything.
Asset finance works in a few different ways, depending on which type of asset finance you opt for. Hire purchase works by enabling you to spread the cost of purchasing an asset over a set amount of time. Once you've paid the lender in full, the asset is yours to keep.
Equipment leasing, on the other hand, works by the lender buying the asset and you paying a monthly fee to rent it. At the end of the agreed term, you can extend the lease, pay the remaining balance to buy it, upgrade to a new model or return the asset back to the lender.
Asset refinance allows you to release cash into your business using your existing assets. You can also use it to consolidate debt or provide security when structuring a deal. Depending on your situation, lenders will typically lend up to 80% of your asset's value.
Here's an example of asset finance in practise.
Imagine you run a manufacturing company and need to buy more machinery due to an increase in demand. You require the equipment quickly in order to meet this new demand, however it would cost thousands of pounds and your business can't afford to pay outright.
After doing some research, you decide to opt for the hire purchase option. As the asset itself acts as the loan collateral, you don't have to offer security which is another plus.
You agree with the lender that they will purchase the machinery and you will lease it from them over a 64-month period. A few days after finalising the loan, you receive the asset you need to increase your company's production capacity.
At the end of the contract, you purchase the equipment outright at a nominal price.
Asset finance is designed for any type of business, including SMEs. It's designed for those who wish to access an item that has high value to support their business’ growth and spread the cost of the item over its usable life. Asset finance is available to eligible limited companies and partnerships, sole traders and public limited companies.
Asset finance is usually provided for anywhere between one to seven years, or even longer in some instances (usually for very expensive assets). The asset finance company recoups the purchase cost of the asset over the agreed period, plus interest.
The length of time the finance is provided for also depends on how long the asset is going to be ‘usable’ for, as well as how quickly the lender wants the money back. As a business borrower, you’ll have to show that you can afford to make the agreed payments.
Paying cash up front for brand new equipment or machinery can be expensive, and could be a risky move that causes cash flow problems. And some companies simply don’t have the working capital for a big purchase — that’s where equipment finance comes in.
Hire purchase is a simple way to purchase an asset and spread the cost over time. You pay in instalments, which means the item appears on your balance sheet, and because you own the asset you'll be responsible for maintenance and insurance costs — but you'll also have full ownership of the item after the term ends.
The lender buys the asset you need, and rents it to you on a lease. That means you have it straight away, and only need a fraction of the total amount up front. Generally, you have to pay the first month’s rent, spreading the VAT over the whole period. At the end of the lease, you can either continue leasing the item, buy it outright at an agreed price (factoring in money already spent), upgrade to a new piece of equipment on a new lease, or simply return it.
Many businesses find leasing a good arrangement because as well as spreading the cost over time, you can adapt to your company’s situation. For example, say a delivery company leases a van, and at the end of the term business is booming — they could get a larger vehicle on a new lease, or a package deal for multiple vehicles.
You get full use of the asset and pay for the full value over time, but don't technically own it — so it does not appear on your balance sheet. That means it's possible to offset rental costs against profit and claim VAT — which could be tax-efficient depending on your situation.
Operating leases, or contract hires, are a more familiar form of equipment leasing. An operating lease is basically a rental agreement with a set term, and maintenance will normally be handled by the lease company (or 'lessor'). Like finance leases, an operating lease won't appear on your balance sheet (which might confer some tax benefits), but operating leases can be cheaper because you don't pay for the full value of the item.
Asset refinancing is the process of securing a loan against valuable items that your business owns, like buildings, vehicles or equipment. It’s a simple idea — if you can’t keep up payments on the loan, the lender takes the asset to recoup what’s owed.
Because you’re effectively ‘unlocking’ cash, the amount you can borrow depends on the value of the assets involved. Asset-backed lending is sometimes used for debt consolidation.
Some lenders specialise in one particular area of asset refinance, while others can finance almost anything that has a resale value. There’s a wide range of asset finance products available, and it can be a very flexible arrangement. However, there are a few restrictions: usually the asset has to be critical to your operations, and it must also be removable so it can be taken as security for the loan.
Asset finance is designed to reduce the costs involved with purchasing an asset upfront. The finance provider purchases the asset for the business before leasing it to them.
Assets like industrial machinery and IT equipment can depreciate over the short-term, which reduces the asset’s value. Asset finance lessens the risks associated with depreciation because the business doesn’t bear the brunt of the asset’s loss in value.
By spreading the cost of the asset over time, you can use spare capital for other growth purposes or keep it aside for security, while gaining access to the equipment your business needs to compete and get to the next level.
Because in many cases the asset lender takes care of the management and maintenance of the asset, you’re protected from costs associated with making sure the asset is working well.
In the majority of cases, the asset itself is deemed suitable security for the loan. Occasionally, a deposit is required. Asset finance can help those who are unable to access more traditional forms of business finance.
In the majority of cases, you’ll be expected to make regular set payments for the required term. As you’re spreading the cost, your cash flow and amount of working capital could improve. Fixed interest rates can also be agreed to make repayments more predictable.
One of the potential drawbacks of asset finance is that you don’t own the asset outright so you won’t be able to sell it if you need more funds, or use it as security for another loan. In some cases you can arrange for ownership to be transferred to you when the term ends.
As the lender needs to recoup the cost of the asset alongside interest, asset finance agreements are usually for a minimum of a year. This could make it an unsuitable option for businesses who require working capital finance for a very short period.
Although lots of asset finance agreements include maintenance and management costs, accidental damage and damage that is considered preventable isn’t usually covered. Under these circumstances, the business would likely have to pay for the repair or replacement.
As with any form of finance, it’s important to bear in mind the timeframe, to make sure you’re only paying for what you need. And for finance leases and hire purchase, you don’t want to be stuck making payments on an asset you no longer use.
An asset finance broker helps their business clients to access asset finance by matching them with a lender that meets their funding requirements.
The Financial Conduct Authority (FCA) covers financial services providers for certain regulated activities, including car hire purchase. General business asset finance isn't classed as regulated by the FCA.
However, a lot of asset finance lenders are FCA-authorised and regulated, and these firms are likely to have rolled out the same processes and practises across their organisation.