What is asset finance?

If you need to buy items that you’ll keep in your business (‘assets’, which could include computers, machinery, and furniture), asset finance can help you fund the purchase.

These items are often expensive, making them difficult to buy outright. Asset finance usually works like a loan, helping you buy the products over a longer period of time, or giving you the option to simply lease them.

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What is an asset in finance?

Assets are valuable items that your business owns. Assets include cash, investments, and equipment. They’re not items that you sell to customers.

Many businesses rely on physical assets like vehicles and machinery to operate. But if you need to buy equipment to get going (or to replace existing items), it can cost lots of money.

What is asset finance?

Asset finance helps you raise funds, whether it’s to buy (or replace) assets or to release capital on existing assets.

One type of asset finance gives you the ability to buy an item by making repayments over a longer period of time, rather than paying for it outright.

Other forms of asset finance might just lease you the items, or give you the option to refinance existing assets (unlocking money that you can invest in other areas of your business). We explain more about the different types below.

Asset finance solutions

Hire purchase

Hire purchase gives you access to assets without paying for them upfront. You effectively ‘hire’ the asset from the lender then make the agreed monthly repayments. At the end of the term, you own the asset.

You can choose the length of the term, which usually lasts between one and six years. There can be fees to pay both at the start of the term (for example, a deposit) and at the end (to secure the asset).

If you default on payments, you may lose the asset.

Finance lease

Finance leasing doesn’t give you the option to own the asset. Instead, you rent the asset from the finance provider, making agreed payments – usually until the provider has made the money to cover the cost of buying the asset.

If the provider sells the asset at the end of the term, they might give you a percentage of the sale value.

Equipment lease

Like finance leasing, equipment leasing lets you rent the asset from the finance provider and make agreed payments.

But at the end of the term, you have different options. You could continue to lease the item, or buy the asset. You might want to upgrade the asset and continue to make payments, or just return it to the provider.

A benefit of equipment leasing is that maintaining and servicing the asset is often down to the provider, not you as the renter.

You also won’t be stuck with out of date equipment, as you can upgrade by leasing a newer model after the initial term.

Another form of equipment leasing is operating leasing, which is usually used for specialist machinery or equipment that businesses only need for the short term.

Asset refinance

Asset refinancing uses your existing assets to unlock funding.

One way this works is by using your assets as security against a loan, meaning you might lose the assets if you default on your repayments.

Another form of asset refinancing involves you selling an asset to the finance provider, which they then lease back to you. You make repayments over a set term.

You can use asset refinancing even if you don’t own assets outright, but you can only access up to the level of equity tied up in the item.

So if you’ve got an asset that you don’t own (for example, under a hire purchase agreement) and you’ve repaid £10,000 of the £12,000 term, you could get asset finance valued at the £10,000 equity (with around 70 per cent of that amount available to borrow typically).

Contract hire

Contract hire providers lease vehicles to businesses, who make the agreed repayments over a term.

You don’t get the option to own the vehicles. Maintenance and servicing rests with the contract hire provider, which can save you time and money.

What assets can you use for finance?

Asset finance providers use the ‘DIMS’ concept to work out which assets to finance. This means they need to be:

• durable
• identifiable
• moveable
• saleable

Assets are also split into hard assets and soft assets.

Hard assets include plant, machinery, equipment, and vehicles. They will fit the DIMS criteria above and are most commonly used in asset finance agreements.

Soft assets, on the other hand, still fit into the DIMS criteria but their lifespan is more limited. They include software packages, furniture, and electronics (like CCTV systems or cash registers). Soft asset finance providers do exist, but can be more difficult to find.

Advantages of asset finance

• a fast and flexible way to access funding
• get new equipment and other machinery without needing to make a huge upfront payment
• fixed repayments help you budget effectively
• invest in other, more important areas of your business
• responsibility for maintenance and servicing can fall to the asset finance provider, saving you time

Disadvantages of asset finance

• you will lose assets if you can’t keep up with the repayments
• over the longer-term, it costs you more than buying the asset outright
• certain forms of asset finance don’t give you the option to buy the item, meaning you’re paying for something that you’ll never own
• beyond maintenance and servicing, you may have to cover repair yourself (for example, if you damage the asset accidentally – equipment insurance may help here)
• because you don’t need to front upfront cash, it can be tempting to get assets that your business doesn’t really need, lumping you with a long-term finance agreement