What is asset finance?

Asset finance allows a business to acquire an asset new to its organisation via leasing or hire purchase.

In this guide you’ll learn about the main types of asset finance, the pros and cons of using asset finance, and how to go about applying for an asset finance product.

As with all financial products, it’s a good idea to seek independent, specialist advice before deciding which product is right for your business and circumstances.

What is Asset finance?

Asset finance allows a business to acquire business-critical assets, replace aging equipment, or expand current operations without putting additional pressure on cashflow or needing to raise a significant amount of working capital before purchase.

The product works by allowing a business to use assets on its balance sheet as collateral to fund a purchase.

Asset finance is a versatile financial product, variations of which can be used to fund purchases of everything from machines and manufacturing plant to office and IT equipment.

What are the different types of asset finance?

Asset finance could be a prudent choice for businesses owners when faced with the challenge of acquiring business-critical equipment without the immediate means for an upfront purchase.

This versatile financing option allows you to opt for smaller, more manageable payments over a mutually agreed period, providing a flexible alternative to a significant initial expenditure.

It's worth noting that, like many forms of business finance, there may be associated fees and interest payments.

However, when approached strategically, asset finance could unlock valuable opportunities for growth and success.

There are a number of different types of asset finance:

Finance lease

With a finance lease, the finance provider takes on the responsibility of purchasing the asset and leasing it to a recipient business.

Throughout the lease term, the lessee will make monthly repayments that encompass both the initial asset cost and the accrued interest.

Additionally, the lessee is accountable for insuring and maintaining the asset.

Upon reaching the end of the lease term, the lessee will have three options:

Continuation: They can opt to continue renting the asset, enabling them to sustain its usage for an extended period.

Return: If it aligns with their business needs, the lessee business has the option to return the asset to the finance provider, freeing up cashflow.

Sale: As an alternative, the lessee can facilitate the sale of the asset on behalf of the finance provider, potentially generating value and freeing up resources for their business.

Operating lease

An Operating lease is a form of asset finance that allows a business to secure equipment for a specified timeframe, with the added flexibility of potentially upgrading to a more advanced model within the rental period, subject to the terms of the agreement.

One notable distinction from a finance lease is that, under an operating lease, the finance provider assumes the responsibility of maintaining the asset throughout the duration of the finance agreement.

This relieves the lessee business of the burden of maintenance tasks.

Contract hire

Contract hire is often used as a solution for leasing vehicles for commercial fleets, a process that can be time-consuming.

However, with contract hire, the provider takes charge of sourcing and maintaining any vehicles you lease from them, streamlining the process.

Through this arrangement, a business can enjoy the flexibility of making payments over a predetermined lease term, ensuring predictable and manageable budgeting.

Read more about Commercial fleeting financing.

Hire purchase

Hire purchase could be a viable financing option for an asset if the end goal is for the business to own the asset outright.

Upon completion of the agreed repayments, the asset is owned by the lessee, providing a tangible return on investment.

Even though the lessee will be able to use the asset as soon as they purchase it, it's important to note that until the lessee fully pays off the asset, the ownership remains with the finance provider.

Whilst paying for the asset the lessee is responsible for the maintenance of the asset throughout the lease term.

Furthermore, selling the asset isn't an option until the term has concluded, unless the finance agreement permits early settlement of the contract.

Read more about Hire purchase.

Business contract purchase or Hire purchase with a balloon payment

Business contract purchase is similar to Hire purchase with the principle difference being that the monthly payments are designed to only cover the interest on the loan.

This effectively reduces the monthly repayment for a business, making it a potentially attractive option for a business looking for lower ongoing costs.

However, the final (or ‘balloon’) payment is required to fully repay the loan.

It's important to keep in mind that while this arrangement can make monthly expenses more manageable, the total cost over the term tends to be higher.

So, while it offers short-term financial relief, it's worth considering the long-term implications before opting for this type of hire purchase agreement.

What are the benefits of asset finance?

There are a number of potential benefits to asset finance for businesses including:

Small upfront costs

A major benefit to asset finance are the small or zero upfront costs for major asset purchases.

This means that a business will be enjoying the benefits of the equipment straight away, without needing to acquire sufficient capital to purchase outright straightaway.

Spreading payments

Since the cost of the asset is spread out over time, asset finance support a business’s cash flow and frees up capital that can be spent on other areas of the business.

Peace of mind

It’s often the case that the cost of maintaining an asset is covered by the finance company and not the business itself.

In some cases the finance company will replace the asset if it develops a fault during the duration of the loan period.

No additional collateral

Since the asset being purchases is the security for the finance provider, there is no need to put up additional assets.

This is particularly helpful for younger businesses or those that do not possess many assets.

Expense

Asset finance can prove cheaper than other forms of business financing.

What are the risks to using asset finance?

In addition to benefits, there are a number of potential drawbacks to asset finance for a business depending on their circumstances.

Ownership

Since the finance provider owns the asset until the borrowing business pays in full, the provider may insist on placing limits on the use of the asset.

A good example of this is a limit on annual mileage for a leased vehicle.

Any deviation from the agreed usage could result in substantial penalties.

Damage

Similarly, a business may also be liable for any damage the asset sustains beyond what’s agreed in the contract whilst it’s still owned by the finance provider.

Longer term

Although there are some exceptions, it’s common for the term of an asset finance agreement to be at least a year.

With some types of asset financing the terms could be even longer, thus representing a substantial long term commitment for a business.

Defaulting

Failing to keep up with repayments or adhering to the terms of the agreement could result in the finance provider repossessing the asset.

Defaulting on the agreement could also have an adverse impact on your credit report.

What is the difference between asset finance and asset refinancing?

It’s important to understand the distinction between asset finance and a product called asset refinancing.

Asset finance allows you to acquire or lease an asset without the need for a big upfront payment.

On the other hand, asset refinance lets you unlock the cash value of an asset that you already own.

Essentially, you can use the asset as collateral and secure a business loan from a lender.

For more information, read our guide on asset refinancing.

Is my business eligible for asset finance?

If your business is capable of meeting its financial commitments, asset-based financing could be a viable option.

This holds true irrespective of your business structure - whether you're a sole trader, involved in a partnership, operating a limited company, or even launching a new startup.

There's a diverse range of asset-based finance options and lenders available to cater to different needs.

However, determining the most suitable type of asset finance, identifying the lowest interest rates, and finding the perfect lender for your specific business circumstances can be a labour-intensive and time-consuming process.

Therefore it’s a good idea to seek independent, specialist financial advice before deciding on the right type of finance to apply for.

How do I choose an asset finance lender?

There are specialist asset finance funders in the UK, as well as funders – including high-street banks – who offer leasing and hire purchase.

It’s a good idea to look into different funders, assessing their reputation, the fine print of their terms and conditions, their customer service, and how flexible they are.

Next, check if they have expertise in financing the type of equipment you need as any potential lender will need to know your specific equipment needs inside out.

Don't be shy about shopping around and comparing multiple lenders.

This will give you a clear picture and help you make a decision that fits your business's financial needs and goals like a glove.

Engaging with funders early on and having open discussions can save you heaps of time and effort further down the line.

It’s also worth remembering that you don't have to do this alone.

Consider using a broker to help you identify a lender that ticks all your boxes and don't forget to look into potential suppliers too.

Remember, the more prepared you are, the smoother your asset finance application process will be.

How can I learn more about Asset Finance?

For more information on asset finance, download the Finance & Leasing Association’s guide: Why use asset finance.

The FLA has also produced a toolkit for SMEs to help them when they are applying for finance.