Asset finance vs unsecured business loans: which is best for your business?

Whether you’re aiming to grow, expand your manufacturing or develop new products or services, laying your hands on the capital and equipment required is often the first hurdle. The good news is there are loads of funding options for businesses out there – and often it comes down to Asset finance vs unsecured business loan. Each has advantages, and the best choice depends on your specific needs. Let's look at the differences and help you decide which is the best fit for your business.

What is the difference between asset finance and an unsecured business loan?

Both asset finance and an unsecured business loan provide access to capital, but they work in different ways. The major departure between the two is between the secured nature of asset finance versus unsecured lending. 

• Asset finance is a type of secured loan where the equipment, vehicle, or machinery you buy doubles as collateral. This reduces the risk for lenders and can lead to lower interest rates.
  
  
• An unsecured business loan, on the other hand, is not backed by specific assets. Instead, approval is based on creditworthiness, turnover, and overall business performance.

The key differences between asset finance vs unsecured business loans at a glance

• Security: Asset finance is secured against equipment, while an unsecured business loan is based on creditworthiness.
• Risk: With asset finance, the lender has the right to repossess the asset if you default, whereas an unsecured business loan does not require collateral but often comes with higher interest rates.
• Flexibility: Unsecured business loans offer more freedom in how funds are used, while asset finance is tied to specific purchases.
• Purpose: Asset finance is useful for acquiring essential equipment or machinery, whereas unsecured loans are ideal for working capital, marketing, and expansion.

How asset finance works: Funding your business with assets

Asset finance is designed for businesses that need to invest in equipment, vehicles, or machinery without tying up their capital. The idea is that you can use your cash elsewhere, while still getting access to the machinery or equipment you need.

Here’s how to get a business loan:

• You secure funding to purchase or lease an asset.
• The lender holds security over the asset, reducing their risk.
• Payments are made in instalments, either through hire purchase, leasing, or an operating lease.
• You may have the option to own the asset outright after the term ends.

This is an excellent option for businesses making capital-intensive purchases and looking for a structured, tax-efficient way to acquire essential equipment.

How unsecured business loans work: Fast funding with no collateral

An unsecured business loan provides quick access to cash without the need to pledge assets. This makes it particularly attractive for businesses that:

• Need immediate working capital.
• Want funds for marketing, hiring, or expansion.
• Prefer not to risk business assets.

Lenders assess applications based on credit score, turnover, and business performance. Providers (like iwoca) can approve and fund loans within 24 hours, making this a powerful option for those who need fast, flexible funding.

Asset finance vs unsecured loan: Which is cheaper in the long run?

When comparing long-term costs, asset finance typically offers lower interest rates than unsecured loans because the asset itself serves as security, reducing the lender's risk, but this doesn’t tell the whole story.

• Asset finance agreements often have longer repayment periods. This longer term, even with a lower rate, can sometimes result in a higher total amount of interest paid over the life of the loan compared to an unsecured loan paid back more quickly (albeit at a potentially higher interest rate). 
• Fees associated with setting up the finance, potential early repayment charges, or asset-related penalties can also impact the total cost.

So while asset finance often has lower rates, whether it's cheaper in the long run depends on the specific terms, including the rate, the length of the repayment period, and any associated fees compared to those of an available unsecured loan.  

Before committing, consider the total borrowing cost, including fees, flexibility, and your ability to repay early.

How credit history impacts asset finance and unsecured loans

Your credit score plays a key role in securing any type of loan. However, its impact varies between asset finance and unsecured business loans.

• Asset finance: A strong credit score helps, but lenders may be more lenient since the asset acts as security.
• Unsecured business loans: Approval is heavily based on your credit score and overall financial health.

Will my credit score affect my ability to get asset finance or an unsecured loan?

Yes, a strong credit score improves your chances of approval and better terms. Traditional lenders like banks, in particular, will look on a high credit score favourably. Increasingly, however, some lenders will look at real-time financial data to assess your application. 

When applying for loans, it’s not even necessarily a case of having a ‘good’ or ‘bad’ credit history. You may simply not have the long financial track record that more risk-averse lenders want. This can be frustrating since your business might be performing well and your ability to repay a loan might be high. 

Fortunately, some lenders offer options beyond traditional credit-based lending. At iwoca, for instance, we assess a wider array of criteria when reviewing an application. We’ll look at your business trading data and financial performance. 

The tax benefits of asset finance vs unsecured business loans

Tax benefits can play a significant role in choosing between asset finance and an unsecured business loan.

• Asset finance: You may be able to claim capital allowances and recover VAT on the asset. Lease payments can also be tax-deductible.
• Unsecured business loans: Interest payments may be deductible, but there are no tax advantages related to asset ownership.

Are there tax benefits to asset finance compared to unsecured loans?

Yes, particularly when acquiring equipment or vehicles. Asset finance can be a more tax-efficient choice because it allows businesses to claim capital allowances on qualifying purchases.

This means you can deduct a percentage of the asset’s cost from your taxable profits, reducing your overall tax liability. However, if you use a standard bank loan to purchase plant and machinery, you can still claim the capital allowances offered by the UK government.

The key difference, however, is that with asset finance, lease payments can also be treated as a business expense (potentially offering additional tax relief).

Which option is best for your business needs?

Choosing between asset finance and an unsecured loan depends on your specific requirements. 

Choose asset finance if:

• You need to buy expensive equipment, vehicles, or machinery.
• You want lower interest rates and can provide collateral.
• You prefer a structured repayment plan with possible tax benefits.

Choose an unsecured business loan if:

• You need quick access to funds.
• You don’t want to risk business assets.
• You need flexibility in how you use the funds.

You may also want to consider a hybrid solution or a lender like iwoca, which offers flexible loans without strict asset requirements.

Is asset finance or an unsecured business loan better for my business?

It depends on your goals. If you are purchasing specific assets, then asset finance is likely the better option. If you need working capital or quick funds, an unsecured loan may be more suitable.

Common mistakes to avoid when choosing business financing

Before committing to either asset finance or an unsecured loan, be aware of these common pitfalls:

• Focusing only on interest rates: The total cost of borrowing, including fees and flexibility, is just as important.
• Not understanding security terms: With asset finance, failing to meet repayments could result in asset repossession.
• Overborrowing: Taking on more than you need can lead to unnecessary debt.
• Ignoring early repayment fees: Some lenders charge for early repayment. iwoca allows early repayment without penalties, saving on interest.

When choosing between asset finance and an unsecured business loan, consider your business needs, the total cost, and repayment flexibility. Asset finance might be the best fit if you are investing in essential equipment.

If you need a quick cash injection with no asset risk, an unsecured loan could be the way to go. Understanding your options ensures you make the right decision, securing funding that supports your business growth without unnecessary risk.

If you think a more flexible, unsecured loan is the better option for your business, take a look at an iwoca Flexi-Loan. Apply for a Flexi-Loan today.