Asset finance loans: what they are and how they work

An asset finance loan lets your company spread the cost of equipment, machinery or vehicles over fixed monthly payments, with the asset itself acting as the lender's security. This type of finance agreement often suits one-off large purchases with a long working life.

There are numerous asset finance loan providers in the UK, offering varied rates, fees, loan formats and repayment terms. So, before applying for one or sign any agreement, check and compare the costs, who'll own the asset, how much deposit you need if director's guarantee is required.

In hire purchase agreements, the VAT on the full price is usually due at the start of the agreement (see HMRC's VAT time of supply manual). So the cash your company needs on day one is usually the deposit and the VAT owed.

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How an asset finance loan works

While there are several types of asset finance loans, which work in slightly different ways, the typical process involves you picking the equipment, the lender paying the supplier, and your company repaying the lender in fixed instalments over an agreed term. Because the asset being acquired or hired is the security, the lender can take it back if fail to make repayments.

Here's are the steps involved using a hire purchase agreement as an example, which Allica Bank states as the most common type of asset finance:

1. You get a quote from the supplier or dealer, new or used.
2. You apply to an asset finance lender, often through the supplier or a broker.
3. The lender checks your company (and its creditworthiness) and the asset you've chosen, then makes an offer.
4. You pay a deposit and the lender pays the supplier the rest.
5. Your company can use the asset straight away and pays fixed monthly instalments, including interest.
6. At the end of the agreement, you can pay an option-to-purchase fee and ownership of the asset passes to your company.

As well acquiring new equipment, asset finance is also often used to replace a broken machine or vehicle (such as a van) without draining cash reserves. The cost lands month by month while the asset earns its keep.

Lenders set their own timescales for decisions, so if your asset needs are urgent, ask how long their checks and paperwork take before you commit to a supplier.

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Types of asset finance compared

The main difference between the common types of asset finance surrounds who owns the asset during and after the agreement. Ownership decides the VAT timing, who claims the tax relief and what happens at the end of the agreement.

Here's a handy table comparing the differences between the main forms of asset finance in simple terms:

If you're weighing up the first two options, our guide to hire purchase vs a finance lease goes deeper in the differences. For the last two options, see our finance lease vs operating lease comparison article.

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Asset finance loan tax and VAT considerations in brief

If you buy an asset with a hire purchase, your company can usually claim capital allowances on this asset. With a lease, the leasing company usually claims them instead. Check the details with your accountant before you choose.

Here are some other tax-related considerations:

• Annual Investment Allowance: your company can deduct up to £1 million a year of qualifying plant and machinery from its profits (gov.uk).
• Full expensing: limited companies can claim it on new and unused main-rate plant and machinery, but not on cars, second-hand kit or assets bought to lease out (gov.uk).
• VAT: on hire purchase, VAT on the whole price is due at the outset; on a lease, it's charged on each rental (HMRC). On a £50,000 machine at the 20% standard rate (gov.uk), that's £10,000 due at the start. A VAT-registered company can usually reclaim it on its VAT return, but it still has to find the cash first.

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Asset finance eligibility criteria

Lending terms and eligibility criteria for asset finance loans vary by lender, so treat any single figure as one lender's rule, not the market's. Minimum amounts, terms, and the share of the price a lender will fund all differ, and so does how long your company needs to have been trading. Always check a lender's own asset finance pages before you apply, and when you're ready to start exploring options, compare some of the top asset/equipment finance providers side by side.

Whatever the headline qualification requirements, expect lenders to look at the following as part of their application assessments:

• Your company's finances: turnover, profit, bank statements and existing debts, to see if the repayments are affordable.
• Your credit history: the company's and, often, the directors' credit records.
• The asset: what it is, its age and condition, and what it would sell for if the lender had to take it back.
• The supplier: a recognised dealer is usually simpler than a private sale.

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What an asset finance loan typically costs

The total cost of an asset finance loan is usually the amount you borrow plus interest and fees – and on some agreements an option-to-purchase fee or a large final payment.

Here's an illustrative example of what that adds up to on a £50,000 asset over five years. It's indicative only: your own figures depend on the asset, your company's credit history, and the lender.

Remember, your own asset finance quote could look quite different and it's important to determine the likely costs before applying or signing an agreement.

Here are the main asset finance costs to confirm with lenders:

• Interest rate: is it fixed or variable, and what's the total interest over the term?
• Arrangement or documentation fees: typically fairly small, but important to know if they apply.
• Option-to-purchase fee: the final fee on hire purchase that transfers ownership.
• Balloon payment: a large final payment that lowers the monthly cost but usually raises the total you pay.
• End-of-lease charges: for leases, any costs for damage or extra mileage.

Assets that lose value quickly can also mean a bigger deposit or a shorter term, because the lender's security shrinks faster.

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Personal guarantees, security and missed payments

The asset is the main security, but it isn't always the only one. Asset finance lenders may also ask for a director's personal guarantee or other security, so don't assume the asset is the limit of what's at stake.

Virgin Money, for example, says it 'may need a personal guarantee from you or someone else. Or security from your business or a guarantor' (Virgin Money). Meanwhile, NatWest's asset finance page states that 'security, guarantees or indemnities may be required' (NatWest).

Be aware that if your company can't keep up repayments:

• The lender can repossess the asset, which may stop work that depends on it.
• If a director has given a guarantee, the lender can ask that director to pay what's owed.
• Missed payments can show on your company's credit file and make future borrowing harder.

Talk to your asset finance provider early if repayments are getting tight. Check out our guide on how personal guarantees work explains what signing one means.

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Asset finance or an unsecured business loan? What's right for you?

Asset finance is usually a good fit if you need one high-value asset with a long working life, whereas an unsecured business loan may suit you better if your funding needs are varied or the asset is harder to finance.

Here's a simple asset finance vs unsecured business loans comparison table to give you an idea of which might be a better fit for you:

While using an asset as collateral could help you get a lower interest rate than an unsecured business loan, be sure to compare the total cost of borrowing when comparing options and providers, before you decide.

For more on the topic, read our comparison of asset finance and unsecured business loans.

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When a Flexi-Loan might fit your needs

While iwoca doesn't offer asset finance, our Flexi-Loan solution can be a good alternative. It can be used to cover the deposit or the upfront VAT, buying used kit a lender won't take, or paying for the costs involved in acquiring new equipment.

Here some common situations where a Flexi-Loan could make sense for your company's asset needs:

• The deposit or the VAT: if hire purchase needs a deposit and VAT on the full price at the start, a short-term loan could cover that cash gap until the VAT comes back.
• Used kit from a private seller or auction: some asset finance lenders won't fund these. A Flexi-Loan is assessed on your company, not the asset.
• Mixed spend: installation, training, fit-out or stock that comes with the new kit and that asset finance won't cover.

Ray Iqbal, founder of The Building Co., needed specialist plant equipment for a December project and used a Flexi-Loan rather than ask his client for money upfront:

I never ask the client to pay for equipment upfront. It doesn't come across as professional. It looks like you don't have confidence, and the client might wonder if you've done this kind of work before. — Ray Iqbal, founder, The Building Co.

How iwoca's Flexi-Loan works:

• Loan amounts: £1,000 to £1 million, with terms up to five years.
• Flexible drawdown: it's a business loan with flexible repayment options – draw what you need up to your limit and repay early at any time with no penalty.
• Decisions: you'll get a decision within 24 hours, but it might be longer depending on the complexity of the request.
• Personal guarantee: every new Flexi-Loan needs a personal guarantee from at least one director.
• Who can apply: UK limited companies.

Since 2012, iwoca has provided more than £5bn of funding to over 100,000 UK businesses.

Asset finance is usually the better fit when you're buying one expensive, long-life asset from a dealer, want the lowest rate the asset can secure and are happy to tie the funding to that asset. If you already have hire purchase or lease repayments, factor them in before you add more borrowing.

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Can you finance second-hand equipment?

Yes. Some asset finance lenders fund used equipment, but expect closer checks on its age, condition and value. Bank of Scotland, for example, lets you buy or lease new or used assets.

Before you buy used equipment on finance, consider the following:

• Get an independent valuation if the lender doesn't arrange one, so you know what the security is worth.
• Check the seller. A dealer sale with a proper invoice is easier to finance than a private sale.
• Plan the tax. Second-hand plant and machinery can qualify for the Annual Investment Allowance, but not for full expensing, which only covers new and unused assets.
• Match the term to the asset's remaining life. Paying for a machine after it's stopped working is the risk to avoid.

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Asset finance loans: common questions

Is it easy to get asset finance?

The asset backing can make it easier to arrange than an unsecured loan of the same size. Approval still depends on your company's finances, and eligibility criteria varies from lender to lender.

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Can you get asset finance with bad credit?

Sometimes, but expect a bigger deposit, a higher rate or a request for a guarantee. Lenders see a weaker credit history as higher risk and price it into agreements (money.co.uk).

It's worth checking your company's credit position before you apply. iwoca's Credit Compass gives you a free business credit score.

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Does asset finance affect your company's credit score?

An asset finance agreement is a credit commitment, so it can show on your company's credit file. Paying on time builds a positive record, while missed payments count against future applications.

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Can a start-up get asset finance?

Some lenders will provide asset finance to start-ups, but many include a minimum trading history in qualification requirements, so a new company may need a larger deposit or a director's guarantee. Ask lenders directly what they'd need from a company without filed accounts.

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Can you use the Growth Guarantee Scheme for asset finance?

Yes, some accredited lenders offer asset finance under the government-backed Growth Guarantee Scheme. Each lender decides who's eligible, so ask whether yours offers it. You can find out more from the British Business Bank.