What is asset finance?

They might be tech, tools or just tables and chairs, but every business needs assets. Asset finance helps owners acquire what they need without having the cash upfront.

By Abby Young-Powell on 04/07/2019

Asset finance can help you acquire expensive kit | iwoca

If you run a small business, it's likely you'll own – or will soon need to own – significant physical assets. Whether office equipment, such as tables and chairs, or something bigger, like heavy machinery or vehicles, these are the tools that will enable your business to succeed, grow and thrive.

So, what is asset finance? In short, it can provide a way for your business to raise the funds to buy or replace assets in an affordable way. It's basically a loan used specifically to buy or lease the products you'll use in the running of your business. You'll likely need it if you want to move your business forward, so here’s asset finance explained.

What is an asset?

Assets are the things your business owns that won't be sold as products. An asset could be anything and depends on what type of business you have. For example, it could be the computers, technology and equipment you have in your office. If you own a small publishing company it could be your printing machinery. Or if you own a catering company, then your assets could be your ovens and refrigerators. If your business is a farm, then vehicles such as tractors could be your assets.

Lending against existing assets vs against prospective assets

Asset based finance refers to both refinancing existing assets and hiring or leasing new assets. Refinancing existing assets (explained below) refers to what you do with the equipment you have already invested in. You would do this if you want to release some of the capital tied up in those assets by selling it to a lender who then leases it back to you.

The other type of asset backed finance enables you to purchase or lease new assets (as outlined below). Both types of asset finance give you access to business assets.

The 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 installments, 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 installments. You’ll also be responsible for 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 installments for the time you are using it. In this 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 a number of 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 you can be flexible about the arrangement, which is good if your business changes, or the assets you need or desire change.

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, then leases it back to you over an agreed period of time. 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 inbetween 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. Is it right for you? If you would prefer to pay smaller installments over a longer period of time, then you may want to consider it.

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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Quick fire facts about asset finance

  • Asset finance is a way to unlock cash from existing assets, or to purchase or lease new ones.

  • You can acquire new assets for your business through hire purchase by paying in installments and owning the item after a pre-defined period, or through equipment leasing, where you pay monthly installments but don’t come to own the item.

  • You can get more from existing assets. Asset refinancing lets you release some of the capital tied up in your assets by selling equipment to a lender, who then leases it back to you.

  • Asset financing is a flexible alternative to taking out a small business loan. It allows you to obtain and use essential equipment without needing to make a lump sum payment upfront.

  • The downside of asset financing is that it is often more expensive than paying for an item up-front.

In summary

Asset finance allows you to get the most from assets you already own, or to purchase or lease new assets for your business. It’s important to work out which type of corporate asset finance or asset finance loan is right for your business. Once you know, bear in mind the timeframe for repayments and ensure you’re only paying for assets you still need.