Every business needs to purchase new assets and equipment, upgrade systems and refurbish offices and commercial property, but when and how you can fund these depends on your circumstances and working capital. 

We explore how asset finance can help you cover the expense of new purchases and spread the costs in a manageable way, including the benefits, the different options to choose from and how they work.

What is asset finance?

Also referred to as equipment finance, asset finance is a type of funding that enables companies to access key business assets without paying for them upfront. It's an agreement used specifically to buy or lease the products and equipment you need to run your business effectively. 

Whatever your business requires, from vehicles and machinery to new tech or furniture, asset finance can help you acquire or access what you need without the big upfront outlay.

Typically, asset finance is secured against a company's existing assets (or those it seeks to own), meaning that the lender can repossess them if the company is unable to pay back any money owed.

Business owners often use asset financing to purchase or lease high-value items. Lenders may want to see that the asset in question meets the DIMS criteria: is it durable, identifiable, movable or saleable? They’ll also want to know the asset’s value and whether it’s hard or soft.

What counts as an asset?

When it comes to asset finance, assets are deemed things your business owns that you won’t sell as products. It could be the computers, technology and equipment you have in your office, printing machinery, ovens and refrigerators (if operating in catering) or vehicles, such as cars, vans, lorries, or even tractors.

Lenders split assets into two buckets: hard and soft assets. The difference is as follows:

• Hard assets include machinery, equipment, or even vehicles. Warehouses, buildings and other business premises also come under this category.
• Soft assets are items seen as less durable and may have no saleable value at the end of the finance agreement. This includes CCTV, tills, security systems, or anything with a limited lifespan.
  

Who can use asset financing?

Technically, any type of business, even sole traders, can use asset financing. While traditionally, bigger businesses and corporations use asset finance solutions, but new minimum levels of finance have meant that smaller and medium-sized businesses are taking advantage of this type of borrowing. It's important to check each lender's acceptance criteria, as many only allow limited companies to apply. 

Asset financing can be a great option if you want to grow your business or invest in new machinery and equipment, but don't have enough funds at the time you need the assets.

The different types of asset finance to consider

Asset-based finance refers to both leasing new assets and refinancing existing assets. Refinancing assets refers to what you do with the equipment you’ve already invested in. You would do this if you want to release some of the capital tied up in those assets by selling them to a lender who then leases them back to you.

Here’s an overview of the different types of asset finance:

Hire purchase

This is a common type of asset-based lending. With a hire purchase, you can buy the asset and pay for it in instalments, so you can get the asset immediately, but spread the cost over time. Once you’ve completed all the payments, you’ll have full ownership of the item.

Hire purchase agreements generally last between one and six years. For this kind of asset lending, you would be expected to pay a deposit before the fixed monthly instalments. You’ll also be responsible for the maintenance and insurance costs of the asset.

Equipment leasing or equipment financing

If you don’t want to buy the asset, you can lease it from a lender and pay monthly instalments for the time you are using it. In an equipment leasing arrangement, you don’t come to own the item, but benefits include being able to have the item straight away and only needing a fraction of the total amount upfront.

At the end of the lease, you have several options. You can continue to lease the item, buy it outright at an agreed price, upgrade it, or return it if you no longer need it. One of the benefits of leasing equipment is that you can be flexible about the arrangement, which is good if your business situation changes.

Asset refinancing

If you’ve already invested in equipment and you want to release some of the capital tied up in those assets, then this kind of asset lending may be right for you. A lender buys your equipment and then leases it back to you over an agreed period. You'll make regular payments spread across that period.

Finance leases and capital leases

A finance lease, also known as a capital lease, is a type of business asset finance that sits in between making a hire purchase and equipment leasing. It’s a longer-term lease for most of the asset’s life. You get full use of it and pay the full value for it over time, but don’t own it. So if you would prefer to pay smaller instalments over a longer period, then it’s worth considering.

Operating leases

This is similar to a regular finance lease, but the company that leases the item to you is responsible for maintenance costs.

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The pros and cons of asset financing

Advantages of asset finance

• Simple: Typically, you can obtain asset finance loans more easily than traditional bank loans.
• Cost-effective: With fixed payments, you know exactly how much you have to pay each month and spreading the cost of an expensive item is often easier to manage than paying for something in one lump sum.
• Fixed charges: Most types of asset financing have fixed interest rates, making budgeting easy every month.
• Capital: Asset financing allows your business to avoid using capital to buy things, meaning it can be invested elsewhere in the business.
• Risk-free: if you fail to pay, you'll lose the assets and nothing else.
  

Disadvantages of asset finance

• Short-term: If you want long-term funding, asset financing usually isn't the right choice.
• Value: The asset value against which the loan is secured can be relatively low and can vary from lender to lender.
• Damage: Any damage that isn't covered under services or maintenance might not be covered in the agreement, which means you would have to pay for it yourself.
• Loss: If you don't pay, you could lose assets that are crucial to your business.
  

How does asset finance impact business credit scores?

Like any debt finance solution, applying for asset finance and managing hire/lease payments will have an impact on your business credit score. Your level of responsibility in the finance agreement dictates whether it’s positive or negative. Applying for asset finance typically leaves a footprint on your credit file, as lenders assess your risk and suitability, but so long as you make prompt repayments, the long-term effect will be an improved credit score. Using a range of asset finance agreements can also boost your score (if managed correctly).

However, taking on more debt than you can handle, resulting in late payments, will significantly harm your credit score and make it harder to get finance in the future.‍

Industry uses cases for asset finance

There are countless sectors in which businesses leverage asset finance, but we’ve outlined a few example uses cases below to give you an idea of common scenarios:

• Construction – asset finance is commonly used in the sector, due to the various expensive machinery involved in builds, including excavators, cranes, diggers and other tools, and juggling different sites.
• Manufacturing – using asset finance enables manufacturers to invest in the latest production equipment and machinery, including automation tools, without huge upfront costs, to increase efficiency and reduce downtime.
• Retail and hospitality – spreading the costs of POS systems, store fittings, hotel refurbishments, location expansion, etc., prevents cash flow issues in key seasons.
• Transport and logistics – asset hiring and leasing agreements are frequently used in this sector for acquiring commercial vehicles and expanding and upgrading fleets to keep up delivery SLAs and new demands.

Asset finance is also popular in sectors like agriculture, for new tractors, harvesters and irrigation systems, and in healthcare, for overhauling outdated IT systems and accessing the latest medical tools to maintain and improve the standard of service.

Comparing asset finance providers

In the UK, many lenders have asset finance offerings, while there are dedicated asset financing partners supporting SMEs and larger firms. Below, we’ve outlined some of the top asset finance providers in the UK, including typical assets they fund and the kinds of sectors they support:

Alternatives to asset finance

Asset finance solutions can be a good alternative to traditional borrowing options. However, if you're looking for more flexibility when it comes to repayments, you might want to consider the alternative options for acquiring business assets, such as:

• Lines of credit
• Invoice finance
• Revenue-based lending
• Small business loans

For example, our iwoca Flexi-Loan was designed to provide fast and flexible finance to SMEs, including borrowing options from £1,000 to £1,000,000. You only pay interest for the funds you draw down and use, and there are no early repayment fees. Plus, you aren’t limited to spending the funds on asset purchases only, you can use our loans for an array of operational needs.

Apply for a business loan with iwoca in minutes and get a funding decision in under 24 hours, with funds often transferred to successful applicants on the same day.