Asset Finance

For any UK business, acquiring essential equipment, vehicles, or technology can be a significant upfront cost. This is where business asset finance offers a powerful solution, allowing companies to gain access to the assets they need without tying up large amounts of working capital. It’s a broad term encompassing various funding options, including hire purchase, leasing (including sale and leaseback), and invoice finance (a form of asset-based lending), each designed to suit different business needs and financial situations.

Unlike traditional bank loans, which might require extensive financial history or perfect credit scores, many forms of asset finance are secured against the asset itself. This often makes them more accessible for small to medium-sized enterprises (SMEs) who may face stricter criteria from high street banks for standard loan products. The asset finance market has seen consistent growth in recent years, indicating its crucial role in supporting SME growth and addressing funding gaps.

What is Business Asset Finance?

At its core, business asset finance is a way for companies to gain access to future income or acquire assets from vehicles and machinery to IT equipment and specialist tools without having to pay the full cost upfront. Instead, a finance provider purchases the asset, and the business makes regular payments to use it over an agreed period. The asset itself acts as security for the finance, which can make it a lower-risk option for lenders and potentially more accessible for borrowers.

Core Types of Asset Finance

Understanding the different forms of asset finance and finding the right solution for your business.

Hire Purchase (HP)

Hire Purchase is a popular option for businesses that ultimately want to own the asset. With an HP agreement, you make regular payments over a set period and at the end of the term once all payments are made (and often an “option to purchase” fee), ownership of the asset transfers to your business.

• How it works for SMEs: SMEs find HP beneficial when they need to acquire assets that will retain long-term value, such as commercial vehicles, construction machinery, or manufacturing equipment. It allows them to spread the cost, preserve cash flow, and build equity in the asset over time. The VAT on the entire value of the asset is often payable upfront, but this can usually be reclaimed by VAT-registered businesses.
• Benefits: Eventual ownership, potential tax benefits through capital allowances and depreciation claims and fixed monthly payments for easier budgeting .
• Considerations: While ownership is the goal, the business is typically responsible for maintenance and repairs during the agreement.

Leasing

Leasing is essentially a rental agreement for an asset. The finance provider retains ownership of the asset, and the business pays regular rental fees for its use over an agreed term. At the end of the lease, the business usually has options to return the asset, extend the lease, or sometimes purchase it for a nominal fee.

• How it works for SMEs: Leasing can be ideal for SMEs that need to use assets for a specific period, frequently upgrade equipment, or prefer to avoid the responsibilities of ownership. Common examples include IT equipment, office technology, or vehicles where regular upgrades are beneficial. Lease payments are often lower than HP instalments, which can help cash flow.
• Types of Leasing:
  • Finance Lease: This is a long-term lease where the business essentially finances the full value of the asset. It appears on the business’s balance sheet, and a portion of the rental is treated as a business expense. At the end of the term, there are typically options to purchase, return, or enter a secondary lease period.
  • Operating Lease: This is more akin to a true rental. The lease term is usually shorter than the asset’s economic life, and the asset generally remains off the business’s balance sheet. It’s common for assets that depreciate quickly or require frequent upgrades. Maintenance and servicing can often be included in the lease agreement, providing predictable costs.
• Benefits: Lower initial costs and monthly payments, flexible upgrade options, potential tax benefits as lease payments can often be deducted as an operating expense and reduced risk of owning depreciating assets.

Asset Refinancing and Sale and Leaseback

Asset refinancing is a way for businesses to unlock cash from assets they already own. If your business owns valuable equipment, machinery, or vehicles outright (or has significant equity in them from a previous finance agreement), you can effectively sell these assets to a finance provider and then lease them back. This is often referred to as a “sale and leaseback” agreement. This injects capital into your business while allowing you to continue using the asset.

• How it works for SMEs: This is particularly useful for SMEs needing a cash injection for working capital, expansion, or to consolidate other debts, without taking out a traditional unsecured loan or diluting ownership through equity. The amount of finance available depends on the asset’s value, condition, and the equity your business holds in it. It’s a way to get extra money for business needs that might work for some businesses.
• Benefits: Releases working capital tied up in existing assets, potentially lower interest rates than unsecured loans due to the asset acting as security and continued use of the assets.

Invoice Finance (Asset Based Lending)

Invoice finance, a key type of asset-based lending, helps businesses improve cash flow by converting unpaid invoices into immediate cash. Instead of waiting for customers to pay, you can get an upfront percentage of the invoice value from a finance provider.

• How it works for SMEs: This is beneficial for SMEs that issue invoices on credit terms (e.g., 30, 60 or 90 days). It can help create a more consistent cash flow, allowing businesses to pay suppliers, salaries, or invest in growth without waiting for invoice payments. There are two main types:
  • Invoice Factoring: The finance provider advances funds and also takes over the management of your sales ledger and collects payments directly from your customers. Your customers will typically be aware you are using a factoring service.
  • Invoice Discounting: The finance provider advances funds, but your business retains responsibility for managing the sales ledger and collecting payments from customers. This is often a confidential arrangement, meaning your customers are not aware you are using the service.
• Benefits: Creates immediate cash flow, provides a flexible funding line that grows with your sales and can reduce the burden of credit control depending on the type of service chosen.
• Considerations: Fees are charged for the service, and the amount advanced is typically a percentage of the invoice value, not the full amount.

Suitability for Different Business Sizes

Asset finance is highly versatile, serving businesses of all sizes, though their needs and the scale of the finance differ.

• SMEs: For small to medium-sized businesses, asset finance is often a lifeline. It enables them to acquire essential tools for growth without depleting vital cash reserves, which might be limited. It can also be more accessible than traditional bank loans, especially for newer businesses or those with evolving credit profiles, as the asset itself provides security for the lender. The flexibility in repayment structures, including seasonal payments, can also be an advantage for managing cash flow.
• Larger Corporations: While larger businesses may have more diverse funding options, they also extensively use asset finance. This might involve financing large fleets of vehicles, heavy machinery for industrial operations, or significant IT infrastructure. For larger firms, asset finance can be a strategic tool for managing balance sheets, optimising tax efficiency, and maintaining access to the latest technology without the full capital outlay. They might engage in more complex structured asset finance deals for substantial investments.

Key Benefits of Asset Finance

Regardless of business size, asset finance offers compelling advantages under the right circumstances:

• Preserves Cash Flow: Avoids large upfront capital expenditure, retaining existing cash for day-to-day operations or financial commitments.
• Access to Modern Equipment: Enables businesses to acquire the latest technology and equipment, enhancing competitiveness and efficiency.
• Flexible Repayments: Some variants of the product enable repayments to be tailored to a business’s cash flow cycles, making budgeting more predictable.
• Tax Efficiency: Depending on the type of asset finance, there can be various tax benefits, such as claiming capital allowances or deducting lease payments as an operating expense. It is advisable to consult with a financial advisor for specific tax implications.
• Security for Lenders: As the finance is secured against the asset, it can be a lower-risk option for lenders, potentially leading to more favourable terms for borrowers, opening up options for those with less established credit profiles.

Current Market Trends

The UK asset finance market remains dynamic. An upward trend in new asset finance business suggests that businesses are actively investing in equipment and vehicles. There’s also a growing focus on green asset finance, supporting businesses in acquiring environmentally friendly assets like electric vehicles or renewable energy technologies. Technology and innovation are also playing a larger role, with digital application processes making asset finance more accessible and faster to secure. Industry experts anticipate steady growth in asset finance in 2025, although new lending to SMEs in some sectors may show slower growth compared to larger businesses and this suggests the continued importance of flexible finance solutions for SMEs.