FundOnion's Guide to Asset Finance

Hard, soft, tangible, intangible, Asset Finance can be a real minefield. Keep your head screwed on with our Asset Finance Guide.

1) Introduction

Need a new Nissan? Looking for another long wheelbase lorry? Got to upgrade your IT system?

Asset finance allows you to get new equipment by spreading repayments in instalments over a set time period rather than in one lump sum. That’s why companies often choose asset finance as it can help manage cashflow.

It’s a popular finance product too, with the Finance and Leasing Association reporting new lending of £36 billion during 2019. However, asset finance has become a tighter market since the arrival of COVID-19, with asset finance deals down 60% in May 2020 compared with 2019.

This has also made the market more competitive, and there are clear opportunities for small businesses to get good rates on finance for their equipment needs.

So we’re going to tell you everything you need to know in our Guide to Asset Finance. It’s all going to be in plain and simple English with no financial jargon or buzzwords. That makes a change for finance stuff doesn’t it?

So, what is asset finance?

It’s a type of financial product available to all kinds of businesses. In recent years though, it’s been mainly used to finance the purchase of commercial vehicles, plant and machinery, IT equipment and other business equipment.
Once you’re familiar with the basic terms, it’s an easy product to understand. We’ve explained these below, and we’ll go through these in more detail in a minute. You can also check out more of the terms we use in our FundOnion Jargon Buster.

In short, asset finance is based on using an asset as collateral for getting funds from a lender, bank or other provider. In fact, it can give you a pretty good deal if you’re looking to reduce your capital expenditure, ease pressure on your cashflow and boost your productivity.

2) Hire Purchase & Lease

There are two main types of asset finance as you can see from our infographic below:

Understanding Asset Finance Types_Infographic

Hire Purchase

A hire purchase arrangement means that the lender obtains the asset from a third party and leases it to you. You then have the option to buy the asset at the end of the term – so you hire then purchase.

Hire Purchase: A Worked Example_Infographic

Lease

For leases, the asset will sit on your balance sheet and you can record the rental costs of the lease onto your profit and loss statement. We’re going to split leases into two strands: finance leases and operating leases.

(i) Finance Lease

With a finance lease, the lender procures and provides the assets to your business. You then take on all of the rights and obligations of the asset until the end of the term.
You pay instalments, i.e. rent, while you have the asset. At the end of the lease agreement, you have to return the asset to the lender. Finance leases usually run for the useful life of the asset.

(ii) Operating Lease

Very similar to a finance lease, but an operating lease runs for less than the useful life of the asset. We’ll give you an example below but importantly, the lender will not try to get back the money they spent buying the asset. They will get that by selling the asset after your lease period is over.

This means that operating leases are generally cheaper than finance leases. This type of product is often used to hire motor vehicle fleets.

3) Applying

Lenders such as Metro Bank, Lombard Asset Finance or Kingsway Asset Finance will look at the value of the underlying asset being financed, as well as whether you can afford to make the payments you’re taking on.
When it comes to hard assets like cars for example, lenders will want details of the product you’re looking to finance. Then they can make a valuation now, and on the asset’s resale value in the future.

To do this, they’ll need to know:

  • The make and model of the asset
  • Any relevant usage information such as mileage
  • The year of manufacture
  • The year of purchase

Lenders will also need some key information about you including:

  • How you’re going to use the asset
  • Your company’s annual turnover and predicted revenues
  • The personal credit history of your directors and any major shareholders
  • Your personal assets for the purposes of the personal guarantee - whether you’re a homeowner for instance