Asset Finance: A Complete Guide

Emily Skellham
Jul 18, 2023
7 min read

Updated: Jan 23

Want to learn more about asset finance? You're in the right place. This is our complete guide to asset finance where we uncover how it works, explore the pros and cons, and answer all of your frequently asked questions.

Learn more below or get in touch to discuss the different asset finance options for your business.

What is asset finance?

Asset finance is a financial alternative that businesses can employ to expand their operations by obtaining essential equipment including vehicles, heavy machinery and plant equipment. Instead of purchasing the assets outright and incurring the complete cost, you make regular payments to utilise the asset for a predetermined duration.

To better understand your options and find the most suitable deal, consider speaking to an asset finance broker.

How asset finance works

Asset finance works by allowing businesses to buy now and pay later – much like consumer finance. If a manufacturing business, for example, wants to invest in new machinery that will improve output, but cannot purchase it outright, they can use asset finance to secure the machinery now and pay it off over a few months or years – with added interest.

The difference between consumer finance and this, however, is that businesses can claim allowances for it as part of a tax-deductible expense.

Different types of asset finance

There are multiple forms of asset finance that cater for all types of business needs. Let's take a look at some of the most common:

Business hire purchase is an agreement that allows businesses to spread the costs of an asset over a set period through monthly payments. During this period, the business will not own the asset – instead, it will hire it until the full payment is made. Often, there is a small fee to pay at the end to secure full ownership of the asset.

To learn more, check out our guide to business hire purchase.

A finance lease – or capital lease – is an agreement between a business and a leasing company which allows the business to take operational control over an asset for a set period. During this time, both the leasing company and the business share a portion of the economic risks and rewards tied to the asset. When the set period is completed, the business usually takes full ownership of the asset.

To learn more, check out our guide to finance lease.

Equipment finance is an agreement that offers a business a loan to secure equipment and machinery through credit arrangements. Equipment finance is often used when the outright payment of equipment would make a significant impact to cash flow.

At the end of the contract, the business can choose to extend the agreement, upgrade to an improved asset or purchase it for a balloon payment.

To learn more, check out our guide to equipment finance. You may also want to consider equipment leasing.

Asset refinance is a way for businesses to release equity on an existing asset that they already own or partly own. This is particularly useful for businesses that have a lot of equity tied up in essential assets such as equipment, machinery, vehicles or property, but need a cash injection.

Lenders will consider accumulated equity for asset refinance deals. So if you’ve used hire purchase to acquire an asset and paid most of it off, asset refinance could be a viable way to release cash back into the business.

To learn more, check out our guide to asset refinance.

Contract hire is a form of vehicle leasing for businesses, where as the name suggests the business hires a vehicle for an agreed amount of time. At the end of the contract the vehicle is given back or swapped for a newer one, so the business never ends up actually owning the vehicle.

To learn more, check out our guide to business contract hire.

Similar to a finance lease, an operating lease allows a business to take operational control of an asset for some time but won’t own it at the end. Unlike a finance lease, an operating lease will only cover part of the useful life of the asset and will then be sold or rehired by the lessor when the agreement is over. In this agreement, the leasing company takes the full risk of the asset at the end of the term.

What items can you get with asset finance?

Asset finance can be used to purchase physical items such as equipment, vehicles and machinery as well as things that may be more difficult to resell afterwards including software and things like CCTV systems.

Usually the assets need to be durable, identifiable, moveable and saleable for them to be approved for finance.

What are the benefits of asset finance?

Asset finance offers businesses great benefits that support growth and financial stability. The most common benefits include:

Cash flow management: Acquire assets without upfront payment, preserving working capital and maintaining cash flow.
Access to high-quality assets: Obtain state-of-the-art equipment, machinery, or technology that may otherwise be unaffordable, improving productivity and competitiveness.
Flexibility and scalability: Tailor repayment structure and lease terms to meet specific business needs, allowing for easy upgrades or replacements as requirements change or expand.
Tax benefits: In many jurisdictions, asset finance arrangements provide tax advantages, with lease payments treated as operating expenses that can be deducted from taxable income, reducing overall tax liability.
Risk management: Mitigate risks associated with asset ownership, as lessors often handle maintenance, repairs, and obsolescence, particularly beneficial for rapidly evolving industries.
Preservation of credit lines: Utilise asset finance to preserve existing credit lines for other business needs, such as expansion or unforeseen expenses.
Access to specialised knowledge: Asset finance providers offer expertise in specific industries or assets, providing valuable insights and assistance in selecting the right equipment or technology.

Note: The benefits of asset finance can vary based on circumstances, industry, and asset type. Consultation with financial professionals is recommended to assess suitability and advantages in individual situations.

What are the drawbacks to using asset finance?

While asset finance can be advantageous for many business, it won't be the right fit in all circumstances. There are some drawbacks to certain types of asset finance that are worth considering, including:

Lack of ownership – With some forms of asset finance the business will never own the asset, so it may not make financial sense for you to pay so much for something you don’t own.
Approvals – The asset a business wants may not be available to finance if it does not meet the lender’s criteria.
Interest – During the period of finance, businesses will often be charged interest – but this tends to be on a fixed rate.
Disruption in operation – If there is any reason a business cannot meet a payment in the future, the asset may be returned to the lender which can cause an issue in operations.

Asset finance FAQs

What is the difference between asset finance and refinancing?

Short-term asset finance refers to a financing solution that allows businesses to acquire or lease assets for a short duration, typically ranging from a few months to a couple of years. It is designed to meet temporary or immediate asset needs, providing businesses with flexibility and agility in managing their operations.

Asset finance and asset refinance are two financial concepts that involve using assets for financing. Here's a simplified breakdown, which highlights the differences between the two:

Asset Finance:

Acquiring or leasing assets using external funding.
Allows businesses or individuals to access assets without upfront payment.
Financing is provided by banks, institutions, or asset finance companies.
Repayment through regular instalments over a set period.
Helps preserve working capital and offers cash flow management, flexibility, tax benefits, and risk mitigation.

Asset Refinance:

Using owned assets as collateral to secure a loan.
Assets are already owned outright.
Appraised assets can be used to borrow funds.
Borrowed amount can be used for various purposes.
Repayment terms and conditions depend on asset value, marketability, and creditworthiness.

In summary, asset finance involves obtaining assets through external financing, while asset refinance involves using owned assets as collateral to secure a loan. Both approaches provide access to funds, but their mechanisms and purposes differ.

Can you get asset finance with bad credit?

Getting asset finance with bad credit is usually more challenging as lenders assess credit history for loan applications. Bad credit implies a higher risk for lenders due to late payments, defaults, or financial difficulties.

Although difficult, it's not impossible to obtain asset finance with bad credit. If using high-value assets as collateral, lenders consider the asset's value rather than personal credit. However, lenders may still review business accounts to ensure payment capability.

For hire purchase or leasing of vehicles or equipment, personal credit may affect decisions for sole traders or partnerships. Limited companies prioritise the business's credit rating, but lenders still need assurance of regular payments. Personal credit may matter if providing a personal guarantee, even for limited companies.

Can you get asset finance as a small or start-up business?

Yes! Asset finance can be an excellent way for small businesses and startups to secure the necessary vehicles and equipment while minimising the upfront cash outlay. By using the equipment itself as collateral, asset finance offers a practical solution.

Instead of tying up valuable funds in a long-term purchase, businesses can allocate those resources to other areas of growth and development. Whether you're a sole trader, partnership, or limited company, asset finance options such as hire purchase, asset refinance, and leasing are accessible, regardless of your business's duration of operation.

Apply for asset finance

Overall, asset finance is a great option for businesses who want to increase operations and brand growth but aren’t in a position to invest in equipment outright.

If you are looking to apply for asset finance, why not get in touch with our experts who can find you the most suitable deal? Start by checking your eligibility here.