Asset finance is a way for your business to get the equipment, vehicles or machinery it needs without paying the full cost upfront. Instead, you spread the cost over monthly payments, and the asset itself usually acts as security for the finance.
Because the lender can recover the asset if repayments stop, asset finance is often easier to get than an unsecured business loan, and rates can be lower too.
How Does Asset Finance Work?
With asset finance, you choose the asset you need from a supplier, and the finance provider pays for it. You then make regular payments over an agreed term, often between one and five years. Depending on the type of agreement, you either own the asset at the end, hand it back, or upgrade to a newer one.
Most agreements need a deposit or an upfront payment, and the amount you can borrow depends on the value of the asset, your trading history and your business’s finances.
What Are the Different Types of Asset Finance?
The main types are:
- Hire purchase – you pay off the asset in instalments and own it once the final payment (and any option-to-purchase fee) is made.
- Finance lease – the lender owns the asset and you rent it for most of its working life. At the end, you may be able to keep renting it or sell it and receive a share of the proceeds.
- Operating lease – you rent the asset for a shorter period than its working life, then return it. This suits equipment that goes out of date quickly.
- Contract hire – a type of operating lease commonly used for vans and company cars, often with maintenance included.
- Asset refinance – you release cash tied up in assets your business already owns, by borrowing against them.
What Can I Use Asset Finance For?
Almost any physical asset with a resale value can be financed. Common examples include vans and lorries, construction plant, manufacturing machinery, IT equipment, catering equipment, and medical or dental equipment. Many of these count as plant and machinery for tax purposes, which can affect how your business claims tax relief on them.
What Are the Benefits of Asset Finance?
The biggest benefit is cashflow. Rather than spending a large sum in one go, you keep your cash free for running costs, stock or growth, which can make a real difference to how you manage cashflow.
Payments are fixed in most cases, which makes budgeting easier, and the asset can start earning money for your business straight away. There can also be tax advantages. For example, if you buy equipment on hire purchase, you may be able to claim capital allowances on the asset from when you start using it, although not on the interest. Always check with your accountant how the rules apply to your business.
Are There Any Downsides to Asset Finance?
Yes. Over the full term you will usually pay more than the cash price of the asset, because of interest and fees. If you fall behind on payments, the lender can repossess the asset. And with leasing agreements, you may never own the equipment at all.
Is Asset Finance Better Than a Business Loan?
It depends on what you need the money for. If you are buying a specific piece of equipment, asset finance is often cheaper and easier to arrange, because the asset secures the borrowing. If you need funding for things that are not physical assets, such as wages, marketing or a tax bill, a business loan or working capital loan is usually a better fit.
If you plan to finance a car rather than a van or equipment, be aware that business cars have different tax rules, so check these with your accountant first.
See also: What is the Difference Between Secured and Unsecured Business Loans?