How asset finance could help your business

If you need to buy equipment or machinery for your business but don’t have the funds to pay for it upfront, asset finance can offer a more affordable solution. 

Read on to find out how it works, the different types of asset finance available, and the pros and cons of using asset finance. 

Key takeaways

• Asset finance enables you to spread the cost of assets, such as machinery and equipment, rather than paying for them upfront

• At the end of your agreement, you might own the asset outright, return it or have options to purchase the asset or renew your agreement

• Different types of asset finance work in different ways, so it’s wise to compare them

• Asset finance can preserve your cash flow and be easier to obtain than a business loan

• Your lender could repossess the asset(s) if you fail to meet your repayments 

What is asset finance?

Asset finance enables businesses to acquire assets needed to run their operations. Examples include:

• Plant machinery

• Business vehicles

• Tools

• IT hardware, such as laptops, servers or phone systems

• Construction equipment

• Agricultural equipment

• Manufacturing equipment

Rather than investing large amounts of capital upfront to pay for this equipment outright, asset finance enables a business to spread the cost over time - making smaller, regular payments over the term of their agreement.

Thanks to this flexibility, it can be easier to replace old and tired equipment or buy additional equipment to help expand your business and increase the volume of products you offer or sell without compromising your cash flow. 

How does asset finance work?

Depending on the type of asset finance you use, you may need to put down an initial deposit for the asset you wish to acquire and then borrow the remaining sum. You repay this amount, plus interest or fees, in monthly instalments.

Your asset acts as security in this type of finance agreement. 

At the end of the agreement, you might own the asset outright, purchase it, return it or choose to renew the agreement.

What are the different types of asset finance?

There are several different types of asset finance, as outlined below:

Hire purchase

Hire purchase is one of the most common forms of asset finance. Here, a lender buys the asset, and you lease it from them, making regular payments over a pre-agreed term. The asset appears positively on your balance sheet from the start of the agreement, but the lender retains ownership until you’ve completed your payments. 

Once you’ve covered the cost of the asset and the interest, you pay a purchase fee (or balloon payment) to own the asset outright. 

Note that you remain responsible for maintaining the asset throughout the lease term and you cannot sell the asset until either the term ends or you settle the contract early. 

Finance lease

Again, with finance lease, a finance provider purchases the asset on your behalf and leases it back to your business. You make monthly payments throughout the lease term, which include the initial asset cost and interest. 

It’s your responsibility to maintain and insure the asset during the lease term. Once the term ends, you can choose to continue renting the asset, return the asset to the provider, or sell it to a third party on behalf of the finance provider.

Operating lease

An operating lease enables your business to acquire equipment for a limited period. You rent the asset during that time, making regular payments. 

One of the biggest benefits of an operating lease is you may have the opportunity to upgrade to a newer model during your rental period. It remains your business' responsibility to maintain the asset throughout the agreement. 

Contract hire

Contract hire is generally used to lease cars and vans. It can be particularly beneficial for businesses that require vehicle fleets. That’s because the provider handles the sourcing and maintenance of the vehicles, saving your business time and streamlining the process.

You make payments over a set lease term and at the end of the rental period, you can choose to extend the term or return the vehicles. 

Asset refinance

Asset refinance can help you release funds back into your business. A lender evaluates the equity in asset(s) you already own out-right, provides a cash injection based on that value, and wraps it into a new lease agreement so your day-to-day operations face zero disruption.

What are the advantages of asset finance?

There are many benefits to using asset finance. These include:

• No large initial outlay: Asset finance can help you access the equipment you need without investing large sums upfront

• Manageable payments: You can spread the cost through monthly payments over an agreed period and maintain a steady cash flow

• You may be able to upgrade: Some agreements allow you to upgrade your equipment regularly

• Save on maintenance costs: With some forms of asset finance, it’s the lender’s responsibility to cover maintenance costs

• Helps you keep cash in the bank: You don’t need to tie up cash reserves in your assets, leaving you more for everyday business spending 

• Can be more accessible: If you have poor credit, you may find it easier to get asset finance than a traditional business loan

What are the disadvantages of asset finance?

As with any type of finance, there are drawbacks to consider too:

• Often more expensive: Asset finance is more expensive than buying an asset outright

• Assets are used as security: This means if you fail to meet your repayments, the lender could repossess the assets

• Limits on use of equipment: In some cases, the lender might restrict the use of the asset, such as placing an annual mileage limit on a lease vehicle. If you ignore this, you could face penalties

• Damage liability: Depending on the type of asset finance, you may be liable for any damage to the asset that falls outside the scope of your agreement 

• Long-term commitment: Most asset finance agreements are at least a year in length

• You may never own the asset: Depending on your agreement, your business may never actually own the asset 

Is my business eligible for asset finance? 

Sole traders, partnerships and limited companies can all apply for asset finance, but you will need to prove to lenders you can afford to meet the monthly repayments on time to be successful. 

Additionally, you must run a UK-based business, and some lenders may ask that you have been trading for a set amount of time. You will typically need to show your bank statements for the past year.

Once the lender approves your application, it funds the purchase and your business gains access to the asset. 

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Is asset finance right for your business? 

If you’re looking to expand your business and need access to the latest equipment and technology but don’t have the capital to buy it outright, asset finance is certainly worth considering. It can be particularly beneficial if your business is new or if your business experiences fluctuations in cash flow. 

However, it’s crucial to shop around and compare your options carefully to ensure you can comfortably afford the repayments. You should also consider whether you want to own the asset at the end of the agreement, whether you’re happy to pay a deposit and how long you want to finance the asset for. 

Other financing options you might want to consider include:

• Working capital loan

• Cash flow loan

• Revolving credit facility.