What is asset finance?

Asset finance is a way of funding the purchase of equipment, vehicles, machinery, or other physical assets for your business - without having to pay the full cost upfront.

In this guide, you'll learn how asset finance works, the different types available, the potential benefits and risks, and how to decide whether it could be right for your business.

What is asset finance?

Asset finance is a broad term for a range of funding products that allow your business to acquire or use physical assets - such as vehicles, manufacturing equipment, IT infrastructure, or specialist machinery - by spreading the cost over time.

Rather than paying the full price in one go, you could make regular payments (usually monthly) over an agreed term, which may help your business manage its working capital more effectively.

Asset finance is one of the most widely used forms of business funding in the UK, and it may be suitable for businesses of all sizes - from sole traders to larger enterprises.

How does asset finance work?

The basic principle of asset finance is straightforward: a finance provider either purchases an asset on your behalf or lends against an asset you already own.

You then make regular payments over a set period - typically between one and seven years - and, depending on the type of agreement, you may own the asset outright at the end or return it.

The cost of the finance will depend on several factors, including the value of the asset, the length of the agreement, your business's financial history, and the type of asset finance you choose.

What are the different types of asset finance?

There are several types of asset finance, and the right one for your business will depend on your specific circumstances and what you're looking to achieve.

Hire purchase

With hire purchase, you pay regular instalments over an agreed term and own the asset outright once you've made the final payment. This could be a good option if you want long-term use of the asset and prefer to build equity in it over time.

Finance lease

A finance lease allows you to use an asset for most of its useful life while making regular payments. You won't usually own the asset at the end, but you may be able to extend the lease at a reduced rate or arrange for it to be sold.

Operating lease

An operating lease is typically shorter in duration and may suit businesses that need to use an asset for a limited period or want to upgrade regularly. You return the asset at the end of the agreement.

Refinancing

If you already own business assets, you may be able to release capital by using them as security for a loan. This could help fund growth or manage cash flow without selling the asset.

What are the benefits of asset finance?

There are a number of potential advantages to using asset finance for your business:

• Preserve working capital - spreading costs over time could help you keep cash in your business for day-to-day expenses.
• Access to better equipment - you may be able to acquire more expensive or higher-quality assets than you could afford to purchase outright.
• Fixed payments - in most cases, you'll know exactly what you're paying each month, which could help with budgeting and cash flow planning.
• Tax benefits - depending on the type of agreement, you may be able to offset payments against your taxable profits. It's worth speaking to your accountant about this.
• Flexible terms - agreements can often be structured around seasonal income or other business patterns.

What are the risks?

It's important to consider the potential drawbacks alongside the benefits:

• Total cost - you'll typically pay more in total over the term of the agreement than you would if you purchased the asset outright, because of interest and fees.
• Commitment - most agreements are fixed for the full term, so if your circumstances change, you may not be able to exit easily or without additional charges.
• Depreciation - some assets, particularly vehicles and technology, may depreciate faster than you're paying them off, which could leave you owing more than the asset is worth.
• Personal guarantees - some lenders may require you to personally guarantee the agreement, which means your personal assets could be at risk if the business can't make the payments.
• Ownership - with some types of asset finance, you won't own the asset at the end of the term.

Is my business eligible for asset finance?

Eligibility criteria vary between providers, but in general, you may be more likely to qualify if your business has been trading for at least a year, has a reasonable credit history, and can demonstrate the ability to make regular payments.

Some providers may consider newer businesses, particularly where the asset itself provides strong security. If you've had credit difficulties in the past, it's still worth exploring your options - specialist lenders may be able to help.

How does asset finance differ from a business loan?

A business loan typically provides a lump sum of cash that you can use for any purpose, whereas asset finance is specifically tied to the acquisition or use of a physical asset.

Because the asset acts as security, asset finance may be easier to obtain than an unsecured loan, and interest rates could be lower. However, a business loan may offer more flexibility in how you use the funds.

It's worth noting that merchant cash advances or invoice finance could also be alternatives worth considering, depending on your needs.

How do I choose a provider?

There are a number of factors it could be worth considering when comparing asset finance providers:

• The total cost of the agreement, including interest, fees, and any balloon payment at the end.
• The length and flexibility of the term.
• Whether you'll own the asset at the end or need to return it.
• The provider's reputation, including reviews from other businesses.
• Whether the provider is authorised and regulated by the Financial Conduct Authority.

It may also be a good idea to speak to an independent business finance advisor who can compare options across the market on your behalf.

How can I learn more?

The British Business Bank provides free guidance on business finance options, including asset finance.

You may also find it helpful to read our related guides on business loans, working capital, and commercial mortgages.

If you'd like personalised guidance, Mark Hagan is available to discuss your situation - free of charge and with no obligation.