Asset finance has become one of the go-to funding solutions for many companies and a large proportion of UK investment in machinery, equipment and software now flows through asset finance.
Yet despite this popularity, many business owners still scratch their heads about this type of business loan and the most effective ways to use this option. Whether you’re weighing up hire purchase agreements, considering operating leases or just getting to grips with how asset finance actually works we can help.
If you’re wondering what makes asset finance different from other funding options this guide breaks it down from which assets qualify for financing to selecting the right funding type for your specific business requirements.
We’ll walk through navigating interest rates, understanding what lenders want to see in your application and helping you decide whether working with brokers makes more sense than going straight to lenders. After all, the right approach varies depending on your particular situation.
Understanding asset types and their financing options
When you’re looking into asset finance for your business, getting your head around different asset categories matters. Asset Finance is a term that is used to describe a group of loans that use an asset, such as property, machinery or vehicles as the security against a loan. The loan reflects the asset value and can be used to unlock funds in your existing business assets, or to acquire new assets. The structure of the loan can change to enable various outcomes of full ownership to hire, return or advance on future income.
Choosing the right type of asset finance for your business
Picking the most suitable asset finance option can make a big difference to your business’s bottom line. Each approach serves different needs, timeframes and ownership goals. Let’s break down your options.
Hire purchase for long-term ownership
Hire purchase lets you spread the cost of buying an asset over time through fixed instalments. You’ll generally pay an initial deposit followed by monthly payments covering both the asset’s value and interest. Once you’ve made all the payments, ownership shifts to your business.
Key advantage: You’ll eventually own the asset outright, adding a valuable item to your balance sheet. Hire purchase works well for both new and second-hand assets, and comes with fewer usage restrictions compared to other financing options.
Operating lease for short-term use
An operating lease is basically a rental agreement for part of an asset’s useful life making them good for businesses using equipment that needs frequent updating.
Renting rather than buying offers affordability benefits. It’s generally much more affordable than purchasing outright, an advantage for smaller or newer businesses that haven’t yet built up the financial muscle to acquire expensive assets. Worth noting: when an operating lease ends, you don’t have the option to purchase the asset.
Finance lease for flexible usage
With a finance lease, your business gets operational control of an asset for a set period while the leasing company keeps ownership. This setup offers flexibility regarding payment structures and what happens at the end of the lease.
When a finance lease concludes, you typically have three options: hand back the asset, continue leasing at a reduced rate, or sell the asset and pocket the surplus after paying the lender. Finance leases can work for businesses that can’t use contract hire solutions.
Asset refinance for unlocking capital
Asset refinance helps you free up capital from equipment you already own while continuing to use it in day-to-day operations. Through this “sale and leaseback agreement,” you transfer ownership to a lender but carry on using the asset by making monthly payments.
This option is useful when your business is “asset-rich but cash-poor,” giving you a sum to inject into operations without disrupting your productivity.
How asset finance supports business growth
Asset finance isn’t just about getting your hands on equipment – it can actually serve as a strategic growth driver for your business. This funding approach enables expansion in several key areas whilst keeping financial strain to a minimum.
Scaling operations with new equipment
Want to grow your business without emptying your bank account? Asset finance lets you scale operations without the burden of large upfront costs. Your business can get what it needs straightaway and spread the payments over time. This could be valuable in a situation when you’re facing increasing customer demand that your current capacity can’t handle.
If a business is expanding, then the goal would see the new equipment essentially pay for itself through increased output. Sometimes, the smartest move is making the investment that generates more revenue.
Improving efficiency and productivity
Asset Finance can provide your business modern, high-quality equipment that delivers productivity gains and the latest technology that might otherwise remain frustratingly out of reach.
You should assess if this can provide some of these benefits to your business:
- Cut down production time and time lost by equipment failures or inefficiencies
- Boost collaboration between your team through improved systems
- Step up output quality whilst potentially reducing operational costs
New electric and emission-free vehicles actually qualify for 100% tax relief, offering both efficiency improvements and tax advantages. This double benefit makes asset finance attractive for businesses who require vehicles.
Preserving working capital for other needs
Perhaps an often overlooked purpose of asset finance is maintaining healthy cash flow. By reducing or completely eliminating upfront costs for major purchases, your working capital stays available for other business requirements.
This financial flexibility means you can:
- Put money into strategic growth initiatives
- Keep funds liquid for unexpected opportunities
- Adapt quickly to economic shifts without compromising day-to-day operations
Planning and applying for asset finance
Preparation for your asset finance application by getting to grips with what lenders expect is going to help you increase your approval chances. Get familiar with the application process and cost structures and you’ll be in a good place to take the next step.
What lenders look for in your application
Lenders will assess your company’s financial stability and creditworthiness and usually look for at least 13 months of trading history. They may also stipulate a minimum annual turnover, but this really all depends on the type of asset finance you are considering.
It is however fair to state that your business credit rating will be an influential factor in your approval and terms offered. Your application will require evidence to support the numbers so prepare to provide:
- Historical bank statements and financial records (upto 3 years)
- Cash flow forecasts and business plans
- Proof of asset value or asset required and purpose
Lenders will conduct thorough due diligence on both your business and the asset you want to finance. They’re essentially checking if your business shows enough financial health to keep up with repayments, while also making sure the asset meets their lending criteria.
Using brokers vs going direct
Going straight to lenders can sometimes speed up approval, especially if it’s offered by your existing lender or account provider and remove a potential broker fee, but working with brokers brings its own set of advantages.
Brokers can connect you with dozens of market wide lenders and rates to compare, sometimes securing rates not available directly with lenders. They can also handle your application and their experience should give you the best chance of approval.
Understanding interest rates and fees
Current asset finance interest rates will vary greatly. Several factors influence these rates, the Bank of England base rate, market competition, your credit profile, and the asset type itself and how much risk it poses to the lender.
Interest isn’t the only cost you’ll face. You might also encounter arrangement fees, documentation fees, valuation costs, and potentially early repayment or late payment charges. Working out the total cost means looking beyond headline rates to include all these additional fees. Also worth noting that many lenders require insurance coverage for financed assets throughout the entire agreement term.
Is Asset Finance for You?
Each option serves different business requirements. Asset finance doesn’t just give you immediate access to essential equipment; it can support sustainable growth by preserving your working capital and boosting operational efficiency.
Take some time to evaluate your business circumstances, what assets you actually need, and your current financial position. It’s all about matching the right funding type with your particular business goals and circumstances.
Asset finance stands as a brilliant tool for British businesses wanting equipment funding without draining their cash reserves. While getting your head around different asset types of options might initially seem complex, just a little time spent will bring your understanding quickly to a point to help you identify the funding solution for your business.