Asset finance is a fast-growing funding choice for UK businesses. It makes it easier to buy, use and benefit from big-ticket items such as vehicles, plant machinery, equipment or premises. There’s a wide range of different types of asset financing to meet different business needs and sizes, so you’re certain to find something to suit you.
According to The Finance & Leasing Association, asset financing has become the core driver of the UK economy, with leasing and hire purchases reaching record levels in 2019 of £35.6 billion, 6% higher than in 2018.
In industries where cash flow is tight but necessary to carry out services, asset financing allows businesses to avoid high up-front costs but instead spread them over an agreed time period in smaller instalments.
In this article we will be covering the following:
Asset finance is the practice of purchasing an asset through a third party. They fund the initial purchase on your behalf, and you repay them in instalments over a fixed period. Once the goods are paid in full, you become the owner of such assets.
Asset financing is often associated with purchasing high-value assets for a business where the company may have insufficient funds to buy the asset outright. It can be used as a source of financing to help a business grow whilst also minimising the impact on cash flow. A business could also use pre-existing assets as security against a loan from an asset refinancing provider.
A business that requires the purchase of new assets can look to a finance provider to purchase such assets, repaying them in regular instalments over a fixed period of time.
Depending on the type of asset finance a business chooses, the asset could end up being owned by them, or sold back to the provider (leasing). We will delve more into the different types of asset financing later in the article.
An asset can be described as an object/resource that has a value which can be converted to cash.
Generally, providers consider assets which have a high value such as vehicles, machinery, plant and equipment. These assets must meet DIMS criteria which means that they are:
Assets can also be classified as ‘hard’ or ‘soft.’
There are 6 key types of asset financing you should be aware of:
Whether a form of asset finance is practical for your business will depend on several factors, such as cash flow, age of the business, business size, what you require an asset for and so on.
Hire purchase, sometimes also referred to as “equipment finance” (not to be confused with “equipment leasing”) is where you agree for a third party to finance the purchase of a new asset, and then you repay the loan in instalments over a fixed time period. Vehicle asset finance is one of the most popular sub-types of hire purchase agreements for businesses.
Once the asset has been repaid in full, the ownership of the asset is transferred to you. This transfer of ownership often requires an Option to Purchase Fee. Throughout the repayment period, any maintenance issues and upkeep falls under your business's responsibility, not the provider's.
The core defining feature of hire purchase is that the objective throughout is for you to own the asset by the end of the agreement period.
Finance leasing (sometimes referred to as a “capital lease”) is where a leasing firm purchases an asset for a business on their behalf, which they subsequently rent to them. Vehicle asset financing can also fall into the category of finance leasing.
Payments are made from the business to the leasing firm for a ‘primary rental period’ until both the asset and its interest are repaid. At the end of the primary rental period, the business can choose to extend the rental period and return the asset. With finance leasing, your business never owns the asset, but you are responsible for its insurance and maintenance.
The core defining feature of hire purchase is that the objective throughout is that you are only ever renting the asset for the agreement period and have no requirement or intention of purchasing it.
Equipment leasing or PCP (Personal Contract Purchase) agreements are similar to finance leasing, however with each of these methods you have the option to own the asset once the contract has ended and repayment is made in full. Again, payments are made in smaller instalments over a fixed period agreed in the contract. The firm is responsible for maintenance issues and equipment upkeep.
At the end of the leasing period, your business has several options. You can choose to extend the lease, return it to the leasing firm, upgrade it or buy it outright. PCPs for vehicles often come with a restriction on mileage, and have a final “balloon” payment.
However, because the lease agreement is based on the depreciation of the asset as opposed to the full cost, monthly payments tend to be lower than with other types of financing options. Again, the leasing firm is responsible for an asset’s maintenance during this repayment period.
This type of asset financing is not limited to larger companies like other financing options can be, often being favourable for early-stage companies.
The core defining feature of equipment leasing is that it provides flexibility to determine how you wish to proceed with regard to ownership of the asset at the end of the agreement period.
An operating lease is similar to a finance lease, but the key difference is that operating leases tend to be shorter term and you as the lessee are responsible for any maintenance costs.
Asset refinance falls into two primary categories:
As a business owner, any significant expenditure can be intimidating, especially considering the nature of many businesses where cash flow is restricted. Thankfully, asset financing can help relieve some of the stress for your business if you can find one suitable for your needs.
You need to make sure that before signing any contract you are able to make the agreed monthly repayments and that you have read all the terms and conditions to ensure that you fully understand your liabilities. Failure to make repayments may pose serious risks to the reputation, operation and credit score of your business.
Asset finance offers a number of advantages for businesses including:
Asset finance may not be the best choice for all businesses or situations. As with many things, it’s important to consider if it’s the right tool for the job or the right choice for you. Some of the disadvantages include:
This really depends on the type of asset finance you are seeking, as well as the status of your business. If you’re looking at asset refinancing, the provider will consider the value of the asset as collateral, not your individual credit rating. In other types of financing options where you are operating as a sole trader or partner, your credit score is more likely to play a factor in the agreement. Limited companies need to have good credit scores as this is important for lenders.
Lenders usually want to check business accounts regardless of the type of loan you are seeking to ensure you’re reliably able to make repayments.
If you’re worried about whether you will be able to secure funding for your business due to past poor credit history, contact us and we will be happy to help advise.
With any asset financing, the asset is owned by or transferred to the lender during the leasing period. If you breach the contract or default on the loan, the lender may repossess assets to recoup the funds. This can be particularly harmful to your business if the asset is vital to how it operates.
Both forms use assets as security for a loan, however, they differ in their benefits, costs and associated risks.
With asset factoring, also known as “invoice factoring” or “invoice finance”, a business sells its accounts receivables to the lender, who then sends back a percentage of each invoice to the business. Depending on the financial strength of its customer, this can vary between businesses but is often around 70-85%.
This differs from asset financing as businesses don’t offer up their own assets as a form of collateral and involve a company’s customer base when structuring payments. Loans don’t purely depend on the value of a company's assets.
A short-term loan typically lasts for less than 12 months but could last up to 36 months. It provides cash to a business that offers its assets as collateral or provides a short-term lease of equipment that a company requires for a short period of time. Short-term asset loans will generally have a higher interest rate as the lender has less time to make reasonable returns on interest payments. This helps support cash flow or fund an immediate need.
Financial services firms are regulated in the UK by the Financial Conduct Authority (FCA). They ensure that the services are fair for individuals, businesses and the economy alike. From an asset finance perspective, consumer lending (such as hire purchase for a vehicle) is considered to be a ‘regulated activity’ and therefore will be authorised and regulated by the FCA.
If you want to check your eligibility for asset finance, or simply want to find out more about how it might benefit your business, get in touch with one of our expert account managers to see how Union Business Finance can help.