Find out more about asset financing and whether it’s right for your business with our useful guide…
From phones and photocopiers, computers or vans and tractors, most businesses need equipment or ‘assets’ to get the job done. Asset finance is a way of obtaining goods for your business without paying the full amount up front.
Asset finance allows you to pay in instalments to enable you to free up capital to invest back into your business. It is an alternative to a business bank loan or overdraft that allows you to purchase equipment or machinery that you need to grow and take on new contracts and customers, without having to stall your activity by waiting until it is affordable upfront. You will pay back a set amount in instalments over a set period of time.
How does asset finance work?
It involves paying an agreed amount to use an asset over an agreed period of time to avoid paying the full amount up front.
The process varies depending on the type of contract:
Leasing asset finance
You rent the asset rather than buy it. Rentals are calculated over an agreed term.
- The lender buys the asset
- They lease the asset to you for a fixed monthly sum
Hire purchase asset finance
You take ultimate ownership of the asset after paying regular rentals.
- You pay a deposit
- You pay fixed monthly payments over a period of 12 to 72 months
- After paying the instalments the assets are yours
Refinancing asset finance
You release capital from assets already purchased.
- You invest in equipment
- The lender buys the equipment from you
- The lender leases it back to you over an agreed period and you make regular payments
Who uses asset finance?
Any business that relies on using equipment that can be paid off gradually whilst having the asset immediately. Asset finance is particularly useful for businesses that rely on large equipment such as farming machinery or transport.
What paperwork do I need to produce for asset finance?
A lender will need to see:
- Details of the asset
- The sales invoice
- Information on your financial circumstances
- Information about the supplier of the asset
- An agreement with terms of the loan
They may also require:
- Personal guarantee (by directors)
- Company guarantee (by a parent or associated company)
- Contract Monies charge (where relevant)
Can I use asset financing if I have bad credit?
Credit history and growth prospects for your business will be considered by asset finance lenders.
If you are refinancing an asset, then some lenders will consider it ‘low risk’ as the purchase has already been made.
What are the pros and cons of asset finance?
As with any type of business loans there are pros and cons to using asset finance and you should always be sure you understand how it works.
Pros of asset finance
- Releases tied up cash
- Quick access to funds
- Opens up additional credit lines
- Minimises ownership risk
- Cuts wasted spending
- Fixed payments make it easier to manage your budget
Cons of asset finance
- You have to provide comprehensive paperwork
- It can be more expensive than buying the asset outright
- Some long-term contracts can be difficult to cancel early
- You can’t deduct the value of equipment funded through asset finance for tax purposes
Is an asset finance loan the right choice for my business?
Asking yourself a few simple questions will help you decide.
- Do I have the funds to pay for the equipment I need up front?
- Do I need to release tied up cash?
- Am I prepared to spend more money than the asset is worth to balance out the payments?
If you can comfortably answer these questions, then an asset finance loan might be what you need to support you. If not, you might want to consider a bridging loan? We offer access to the most comprehensive list of asset finance lenders and rates as low as 3% so why not use our calculator to work out if you’d be eligible for asset finance and how much it would cost you?