What can be financed through asset finance?

Asset finance can be used to fund a wide range of tangible business assets, including vehicles, machinery, IT equipment, and more. Whether you're looking to purchase company cars, upgrade production machinery, or invest in new office technology, asset finance provides a flexible solution to spread the cost over time. Many businesses also use asset finance to acquire specialised equipment tailored to their industry. By using asset finance, companies can manage cash flow effectively while securing the tools they need to grow and operate efficiently.

How does asset finance impact my balance sheet?

The impact of asset finance on your balance sheet depends on the type of finance agreement. With hire purchase agreements, the asset typically appears on your balance sheet as a company-owned asset, alongside a corresponding liability for the outstanding loan amount. This reflects both the value of the asset and the debt incurred to acquire it. Leasing agreements, on the other hand, may not be capitalised in the same way, depending on whether they are classified as operating leases or finance leases. Operating leases generally do not appear as assets on your balance sheet, while finance leases may require the asset and liability to be recorded. Always consult your accountant to understand how specific asset finance arrangements will affect your financial statements.

Is asset finance available to all business sizes?

Yes, asset finance is available to businesses of all sizes, from startups and small enterprises to established corporations. Whether you're a new business looking to acquire essential equipment or a large company planning to expand operations, asset finance offers flexible funding options tailored to your needs. Many providers cater to a wide range of industries and business scales, making it an accessible and practical choice for securing the assets required to grow.

Can I get asset finance with a poor credit history?

Yes, it is possible to get asset finance with a poor credit history, but it may be more challenging. Lenders are likely to consider your application higher risk, which can result in higher interest rates and stricter terms. To improve your chances, you might need to provide a larger deposit, secure the finance against valuable assets, or demonstrate strong cash flow and business performance. Some specialist lenders cater specifically to businesses with poor credit, so exploring these options could help. Always compare offers to ensure you find a solution that aligns with your financial situation.

What happens if I can’t keep up with payments?

If you’re unable to keep up with asset finance payments, the lender may repossess the asset as it typically serves as collateral for the loan. This means you lose access to the equipment, vehicle, or machinery financed, which could disrupt your business operations. Additionally, missed payments or defaulting on the agreement can negatively impact your credit rating, making it harder to secure future financing. If you're struggling to make payments, it's crucial to contact your lender as soon as possible. They may offer options such as restructuring the payment terms or providing a temporary payment holiday to help manage your financial situation.

What is the difference between asset finance and leasing?

Asset finance and leasing are both ways for businesses to acquire equipment or assets without paying the full upfront cost, but they work slightly differently. Asset finance typically involves borrowing money to purchase an asset, where the asset then acts as security for the loan. It can be more flexible in terms of how the asset is financed and provides the option to buy it at the end of the agreement. Leasing is more like renting the asset for a set period. At the end of the lease, the business either returns the asset, renews the lease, or has the option to buy it - often at a reduced price. Leasing generally means the business never owns the asset, but it can be ideal for companies that need to upgrade equipment regularly or prefer lower, predictable payments. The main difference lies in ownership: with asset finance, ownership can be transferred after the agreement is completed, while leasing typically involves ongoing use without ownership.

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What is asset finance?How does it work?Is it right for my business?Types of asset finance Pros and cons Alternatives FAQs

What is asset finance?

Asset financing is a type of business loan. It allows businesses to purchase or hire business essentials such as equipment, vehicles, or machinery and pay for it in instalments.

Unlike traditional loans, asset finance is often secured against the item(s) itself, allowing businesses to purchase necessary equipment without investing large amounts of capital up front.

How does asset finance work?

Asset finance allows a business to acquire the essential assets it needs through manageable monthly repayments, ensuring they maintain day-to-day operations heavy upfront investments.

Here's how it works:

1. Identifying the need: It starts with recognising your business's requirement for an essential asset - what do you need? Examples might include machinery, vehicles or IT equipment.

2. Choosing the right asset: Research and select the asset that best meets your operational needs and offers good value. Consider its lifespan, maintenance, and resale value.

3. Finding a finance provider: Shop around for banks, specialised financial institutions, or companies offering asset financing. Compare terms, interest rates, and repayment options.

4. Undergoing credit assessment: The finance provider will assess your business’s creditworthiness, financial health, and repayment capacity, influencing the finance terms.

5. Finalising the finance agreement: If approved, you'll enter into an agreement detailing the finance duration, repayment schedule, interest rates, and any associated fees.

6. Acquiring the asset: The finance provider funds the purchase, and your business gains access to the asset.

7. Making regular payments: Repay the finance plus interest through regular instalments. The repayment schedule will be set out in the finance agreement.

Depending on the agreement type, you might own the asset, return it, or have options to purchase or renew it at the end of the finance agreement.

Is asset financing right for my business?

Working out if asset financing is the right choice for your business involves a careful examination of your financial situation, business model, and long-term objectives.

Here are some factors to consider:

Business cash flow: Asset financing can be particularly beneficial if your business experiences fluctuations in cash flow. It allows you to acquire necessary assets without a significant upfront investment - maintaining liquidity for other operational needs or unforeseen expenses.

Type of assets required: The nature of the assets you need plays a crucial role. If your business depends on high-value, long-lasting equipment (like manufacturing machinery, vehicles, or high-tech computers), asset financing can be a smart way to spread the cost over the asset's useful life. This avoids the risk of the equipment falling behind too, which can happen as technology or machinery rapidly evolves.

Growth and expansion plans: If your business is in a growth phase, conserving cash while acquiring assets can be a strategic move. Asset financing can support expansion plans without the need for big spending, allowing you to allocate resources to other growth initiatives like market expansion, research and development, or increasing headcount.

Credit considerations: Asset financing may be more accessible than traditional business loans, especially for businesses with limited credit history or those that have faced financial challenges. Since the finance is often secured against the asset, lenders may be more willing to consider applications that might not meet the criteria for unsecured lending.

By carefully considering these factors, you can make a more informed decision about whether asset financing aligns with your business needs and financial strategy.

Types of asset finance

Hire purchase

This option suits those aiming for ownership of the equipment or machinery at the end of the finance term. After completing all repayments, the asset becomes yours. Initially, while the asset appears positively on your balance sheet, the finance provider retains ownership until fully paid. Maintenance responsibilities lie with you, and the asset cannot be sold until either the term concludes or you settle the contract early, as per the agreement’s terms.

Business contract purchase

In this variation of hire purchase, monthly payments are minimised, covering only the loan's interest. A substantial final (‘balloon’) payment is then made to clear the loan. While this reduces monthly outgoings, the total cost incurred over time is higher.

Operating lease

Ideal for short-term asset needs, an operating lease allows you to rent equipment for a fixed period. This arrangement often includes options to upgrade to newer models during the lease term. Contrasting with a finance lease, the finance provider assumes responsibility for maintaining the asset throughout the term.

Finance lease

Here, the finance provider purchases the asset and leases it to you. Your monthly payments cover the asset's cost plus interest. Responsibilities for insurance and upkeep of the asset fall on you. At the lease's conclusion, you can choose to continue renting the asset, return it, or sell it on behalf of the finance provider.

Contract hire

Particularly beneficial for businesses requiring vehicle fleets, contract hire simplifies the process. The provider handles sourcing and maintenance of the vehicles, while your business makes regular payments over the agreed lease duration. This option significantly reduces the administrative burden associated with fleet management.

Pros and cons

Pros

Spread out the cost of expensive purchases

Keep your business technologically up-to-date

Tailored solutions to fit your business model

Cons

Long-term costs might be higher due to interest

Commitment to regular payments, regardless of business performance

Can often be more expensive over time than buying an asset outright

“Asset finance allows your business to access the equipment and technology it needs today, without the strain of large upfront costs. With the added flexibility to upgrade at the end of the agreement, it can help you stay agile and keep pace with evolving industry demands.”

Joe Phelan

Small business expert

Alternatives to asset finance

If asset finance doesn't suit your business, here are some other options for financing:

Bank loans

General-purpose loans that might offer lower interest rates but require upfront payment.

Overdrafts

Suitable for short-term needs, albeit with higher interest rates.

Equity financing

Involves selling company shares but no repayment obligations.

Government grants and schemes

Offer non-repayable funds but often come with specific conditions.

FAQs

About the author

Joe Phelan

Joe joined the money.co.uk team in 2024, where he helps small business owners navigate the often confusing world of business finance. His role is to cut through the jargon and create clear, actionable content that empowers entrepreneurs to make confident financial decisions.

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