Asset finance

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What is asset finance?

It’s a type of loan or a way of funding that allows a business to obtain equipment for it to operate, improve and grow.

Depending on what sort of business you run, you could use asset finance to fund the purchase or leasing of things like vehicles, office equipment and computers, construction equipment and tools.

With this type of funding solution, businesses don’t have to pay for expensive purchases upfront, but can instead spread the cost, helping to protect cash flow and capital.

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Types of asset finance

There are a few types of asset finance including:

Hire purchase

This type of finance allows you to buy an asset, usually by paying a deposit and then making regular instalments for it over an agreed time period. When repayments are refinished, you own the asset.

Leasing agreement

You make regular rental payments to use an asset over a set period. When the contract ends, depending on the type of leasing agreement you have, you usually have the option to continue to rent the equipment, buy it, or to return it and rent replacement, updated or more technologically advanced equipment instead.

There are two main types of leasing agreements:

Finance lease

A finance company purchases the business equipment you need and you pay the company monthly lease payments for its use over an agreed term.

You’re responsible for maintaining and repairing the equipment.

The payments you make will cover the cost of the asset, plus interest.

At the end of the lease period, you can usually either extend the lease to carry on using the equipment or give it back and upgrade to lease newer equipment.

Operating lease

With an operating lease, you make regular rental payments for use of equipment, usually over a short-term period.

The equipment remains the property of the leasing company and it’s their responsibility to maintain and repair the equipment.

At the end of the agreement, the asset is returned with no option for the business to buy and keep it.

Advantages and disadvantages of asset financing

  • Advantages

    Depending on the type of asset finance you choose, it can bring benefits to your business in all sorts of ways.

    • You get access to expensive business equipment without having to take large amounts of cash out of the business or which you wouldn’t be able to afford to buy in one go
    • Helps your business access the latest technology and most up-to-date models of equipment by renting or leasing for short periods rather than for the whole of a product’s life
    • Helps you keep cash in the bank, or working capital, to fund the day-to-day running of your business
    • New assets can enable your business to work more efficiently, make savings for your business and increase profitability
    • In some instances, the leasing company is responsible for maintaining, servicing and repairing the business equipment
    • Even businesses with a poor credit history may be considered for asset finance · Fixed payments mean you know what you’re paying every month, so you can budget accordingly · It could be a better option than other high-interest types of finance, like an overdraft or bank loan
  • Disadvantages

    • Asset finance usually ends up being more expensive than using your own funds to purchase equipment outright because you’re charged interest
    • Your asset(s) will be repossessed if you fall behind on repayments, which could make it difficult to run your business
    • You’ll usually need to pay a deposit or up-front fee
    • Certain types of asset finance mean you’ll never own the equipment and have to return it at the end of your lease period
    • Ending a contract early can result in penalty fees

Is asset financing right for my business?

It depends on a lot of things. But, in general, if you want to grow your business and need access to specialist, expensive and cutting-edge technology without taking a hit financially and paying for it in one go (or can’t afford to pay for it upfront), then it could be a good option.

You’ll need to compare different types of asset finance to decide which suits you best and make sure that you can afford the repayments comfortably.

[1]Gocompare.com introduces customers to Cornerstone Finance, a trading style of Cornerstone Finance Group, which is authorised and regulated by the Financial Conduct Authority. Gocompare.com's relationship with Cornerstone Finance Group is limited to that of a business partnership, no common ownership or control rights exist between us. Please note, we cannot be held responsible for the content of external websites and by using the links stated to access these separate websites you will be subject to the terms of use applying to those sites/