Asset finance: get the equipment now, pay for it while it earns

Asset finance lets your company use equipment, vehicles or machinery now and pay for them over an agreed period, with the asset itself as the funder's security. The two main routes are hire purchase, where you own the asset at the end, and leasing, where you rent it. Because the funder can take the asset back if payments stop, asset finance is often cheaper and easier to get than unsecured borrowing for the same amount.

How it works

The British Business Bank describes asset finance as a way for a business to acquire an asset via leasing or hire purchase, spreading the cost over an agreed period instead of paying in full up front.

The main types:

• Hire purchase. The funder buys the asset and you pay for it in instalments. Ownership passes to you once the final payment is made. Until then it belongs to the funder, and you're responsible for maintaining it.
• Finance lease. The funder buys the asset and leases it to you. You insure and maintain it. At the end you can usually keep renting, return it, or sell it on the funder's behalf.
• Operating lease. You rent the asset for a set period. The funder looks after maintenance, and you may be able to upgrade during the term.
• Contract hire. Common for vehicle fleets: the provider sources and maintains the vehicles, you pay a fixed rental.
• Hire purchase with a balloon. Lower regular payments, then a large final payment. The British Business Bank notes the total cost over the term tends to be higher.

How the cost works

Asset finance is priced like a loan: an interest rate (sometimes shown as a flat rate, which looks lower than the APR), plus any documentation, option-to-purchase or arrangement fees.

Worked example, for illustration. £100,000 of machinery financed at 18% APR over 24 months, repaid monthly:

• Monthly payment: £4,992.41
• Total repaid: £119,817.84
• Interest: £19,817.84

That rate is an illustration, not a quote. Real pricing depends on the asset, how easily it could be resold and your company's record. The British Business Bank notes asset finance can prove cheaper than other forms of business finance. Put your actual offer into the loan repayment calculator to check the instalment.

A flat rate is not an APR. A "flat" rate charges interest on the original amount for the whole term, even as you pay it down. On the same quoted number, a flat rate costs considerably more than an APR. Always ask for the APR, or the total payable, before comparing.

Sterling's take: match the term to the asset's working life. Paying for a van over seven years when it lasts four means you're still paying for the old one when you buy the next.

Who it suits

• Companies buying equipment that earns its keep: a production machine, a refrigerated van, a dental chair, a fleet of vans.
• Businesses that want to keep cash for working capital rather than tie it up in kit.
• Younger companies with limited other assets, since the asset is the main security. The British Business Bank notes this as a particular help for businesses without many assets.

Who it doesn't suit

• Short-term cash needs. Asset finance is tied to the asset; it won't cover payroll.
• Assets with little resale value or that are hard to recover, such as fitted-out interiors or bespoke software. Funders find these harder to finance.
• Kit you'll replace well before the agreement ends.

What funders look at

• The asset. Type, age, condition, supplier, and how easily it could be resold.
• Companies House. Trading history, filed accounts, directors, and existing charges or debentures.
• Bank statements, to check the instalments are affordable alongside existing commitments.
• CCJs and defaults against the company or directors.
• Personal guarantees for younger companies or larger deals.
• VAT. It's handled differently on hire purchase and on leases, which changes your cash flow in the first months. Ask how VAT works in your offer and check the treatment with your accountant.

Refinancing equipment you already own

Some funders will also lend against equipment your company already owns outright, paying you cash and taking the asset as security (often called asset refinance or sale and hire-purchase back). It can release working capital from a fleet or machinery that's fully paid for.

Treat it with the same care as any secured borrowing. You're turning an asset you own into one you're paying for again, so check the total payable, what happens if you miss payments, and whether the asset is already subject to a charge registered at Companies House. Run the numbers through the offer checker before agreeing.

Red flags

• A quote given only as a flat rate, or only as a monthly payment.
• A large balloon payment you haven't planned for.
• Restrictions on use you can't live with, such as mileage limits on vehicles. The British Business Bank notes that breaching agreed usage can lead to substantial penalties.
• Early settlement terms that charge most of the remaining interest anyway.
• Option-to-purchase or end-of-lease fees buried in the small print.

Asset finance vs the alternatives