Asset finance allows businesses to release cash from its assets. Learn more about your options and how to find the best asset financing deal for your business.
By Laura Rettie, Personal Finance Journalist.
Asset financing can help your business gain access to the funds it needs. Use our handy guide to find out how asset finance works and how to find the best deal for your business
It’s a type of lending which allows you to borrow money for your business or company.
Business asset financing lets you release cash from your business assets such as property or machinery which can be used as security to finance goods to generate further income or grow your business.
For example, an asset loan could be used to acquire new vehicles to evolve your delivery business without having to buy them upfront.
An asset is an object or resource that has value and can be converted into cash. An asset can be classed as fixed or current.
Fixed assets, also known as tangible assets, are things like:
Current assets, also known as liquid assets, are things that can be turned into cash more quickly, like:
Commercial asset finance works in a similar way to a secured personal loan.
With a secured personal loan, you pay it back with interest over an agreed period, but instead of using your home or property equity as collateral - your business can offer a wider range of assets as security for the loan.
There are two main approaches to asset finance loans: borrowing money against balance sheet assets or using finance to lease or buy business equipment.
Asset finance for equipment allows you to
This works in the same way as hire purchase for individuals. Equipment or machinery is leased over an agreed term and you pay a fixed, regular sum. Your business will be responsible for maintenance and servicing. At the end of the agreed period, your company can choose to buy outright or continue with a renewed lease.
With equipment leasing, the lender buys the equipment required and then rents it for a fixed fee over an agreed term. Once that period ends, your business can either extend the lease, upgrade, buy, or return it to the finance provider.
Unlike hire purchase maintenance and servicing costs are down to the provider, which means your firm has fewer outgoings.
Finance leasing is more akin to simply renting an asset without the option to purchase the items outright. Payments are made to an agreed schedule but unlike hire purchasing, you won’t have the option to buy the asset outright at the end of the agreement.
This tends to be used for specialist equipment, machinery, or equipment that’s only needed for a limited time. Due to its specialist nature, a business may have no interest in buying the item permanently.
This type of asset financing is usually cheaper than equipment leasing because a company only pays for the calculated value of the item over a limited lease time.
There are two forms of asset refinancing: the first is using a company’s fixed or current assets as security against a loan.
The second is where a business sells an asset to an asset finance provider. The finance provider then leases the bought asset back to the business which makes regular repayments to repay the loan with interest over an agreed period.
Also known as contract hire, this type of asset financing relates to vehicles only. A contract hire provider will usually source the vehicle(s) required and cover maintenance and servicing costs. As with other types of asset finance, your business agrees to pay a regular amount with interest over the agreed leasing period.
Both current and fixed assets can be used for asset financing. Fixed asset financing suits longer-term asset refinancing or equipment and machinery leasings. Examples of this are:
Alternatively, ‘current assets’ may be used as collateral for short-term asset loans or more flexible borrowing, for example, to cover expenses or pay a large invoice.
Which asset finance is best for your business will entirely depend on your company’s circumstances. What’s right for one company might not be right for yours.
If you’re unsure what type of commercial asset finance is best for your business get in touch with a broker or specialist lender to talk through the needs of your business.
There are some alternative avenues of credit to consider if you don’t want to go down the asset financing route.
Unsecured business loan: This type of business lending isn’t secured against property or a commercial asset but may be subject to stricter affordability criteria. This could be a good option if you need a quick business loan without risking your business assets.
Lines of credit: This offers a business the option of borrowing money up to an agreed credit limit. Interest is only paid on the balance owed, so it can be useful for solving cashflow issues. However, interest rates can be high.
Merchant cash advance: This is a form of cash advance for businesses, that’s repaid automatically when a business takes a card payment from a customer. This tends to work well for businesses with bad credit, but interest rates may be high and repayment is dependent on trade.
Invoice financing: This type of financing involves selling your unpaid invoices to an investor or broker who immediately gives the invoice's value to your business in exchange for a fee. It’s a flexible form of credit and a handy way to access money owed to you quickly.
Government Start Up loans: These are personal loans for new businesses that can’t get a traditional business loan usually for established businesses. You can borrow between £500 and £25,000 to start or grow your business. There are stricter eligibility criteria but interest rates are low and come with free business mentoring.
Read more about different types of business products; business savings account, secured business loans, business prepaid card, bad credit business loans and commercial bridging loan
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
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The definition tends to differ between providers but asset refinance is essentially the same thing as asset financing or asset-based lending.
Asset refinance can also be used when a pre-existing loan or credit agreement is in place, for example, on a large piece of machinery or equipment and the borrower is looking to change the repayment terms using fixed assets.
No, business asset finance and business lending isn't regulated by the Financial Conduct Authority (FCA). However, the FCA covers financial services providers for related activities like car hire purchase.
Some business lenders and asset finance providers are voluntarily authorised and regulated by the FCA.
They mean the same thing - an asset or group of assets are used as security against a loan.
With asset-based lending the lender considers the asset's value instead of rating the business's creditworthiness. If the borrower or business defaults on an asset-based loan the lender may seize the asset and sell it to cover the cost of the loan.
Asset finance can be used for shorter term funding such as cash for salaries, to purchase raw materials or to cover expenses. So a business is not purchasing a new asset, but using its existing assets to solve a shortfall in cash flow.
If other assets are used to support the loan they may not be considered direct collateral on the loan but can still be seized to recoup any losses.
