The types of asset finance and the benefits of each

What do vans, laptops and CNC machines have in common? They’re all assets that businesses use up and down the country – and they can all get expensive quite quickly.

That’s why asset finance exists: to help businesses buy new equipment without breaking the bank.

As you can see from our question above, assets come in many forms. As such, lending for assets is just as varied. We’ve written this article to help you get a better understanding of the types of asset finance that are available, how you might use them and how you can access them.

 

What is asset finance?

Asset finance is a type of loan that businesses can take out for the purpose of buying an asset.

These loans are specially designed to account for the costs, depreciation, lifespan and risks that are specific to assets.

‘Assets’ is a very broad term. Lenders typically separate them into hard (eg. excavators), medium (eg. portacabins), and soft assets (eg. IT equipment). Some lenders will only fund hard assets, or will offer different terms depending on the class of asset you’re buying.

For a much more detailed view, read our complete guide to asset finance.

 

Why businesses rely on asset finance for growth

If you run a manufacturing business, your equipment will have a limit to how much it can produce in a day. The only way to manufacture more of your product(s) is to increase your capacity.

The same principle applies to service businesses, trades and logistics. To grow your business, your team and tech need to grow too.

The challenge is that assets tend to be expensive and, even if a business has the cash to afford it, buying outright is often not the best way to use a large amount of cash.

Asset finance bridges that gap, helping established businesses grow sustainably and affordably.

 

The types of asset finance explained

Assets come in all shapes, sizes and costs. Beyond that, their usage and depreciation can vary massively. As a result, there are many different ways lenders structure asset finance loans.

Not all lenders offer all of the types of asset finance we’ve listed below, but they’re probably the most common in the market.

Hire purchase 

Under a hire purchase agreement, you pay a deposit on an asset and the lender loans you the rest of the money to buy the asset. At the end of the agreement, you will own the asset outright. It’s similar to getting a mortgage on a property.

You make repayments over a fixed term, with interest and lender’s fees on top. 

According to the Finance & Leasing Association (FLA), £20 billion of hire purchase lending was conducted between June 2023 and June 2024 - 51.8% of total asset finance lending in that time.

Finance lease 

A finance lease sees you rent an asset that’s owned by the lender, in the same way a hire purchase works, but you aren’t planned or expected to take ownership of the asset at the end of the lease.

At the end of the agreement, you can choose to:

• Return the asset to the lender to sell, who refunds you any of the surplus sale 

• Sell the asset yourself, paying the lender first and keeping the surplus for yourself 

• Continue leasing at a much-reduced rent

For the duration of the lease, you’re responsible for upkeep and maintenance.

FLA data estimates finance leasing accounted for £3.4 billion of total asset finance lending between June 2023 and June 2024 (8.6% of the total).

Operating lease 

An operating lease is much like a finance lease, however the terms of ownership and ongoing maintenance are different.

Operating leases are more of a straightforward ‘borrowing’ – you lease the asset from the lender, who retains ownership and responsibility for its upkeep, maintenance and repairs. At the end of the lease, you return the asset to the lender.

Unlike finance leases, operating leases don’t typically have a structure in place for you to buy the asset at the end of the lease.

The FLA’s data showed operating leases totalling £9.9 billion (or 25.3% of total asset finance lending) between June 2023 and June 2024.

Asset refinance 

Refinancing is used for assets you already own or partly own. The refinance process sees you, effectively, sell some of your equity in an asset back to a lender in exchange for the cash equivalent.

If you have multiple assets leased, you can refinance them under one loan instead of several.

Asset refinance helps businesses restructure their borrowing and debt, ideally to reduce their repayments and interest owed.

Contract hire 

Contract hire is a specific type of operating lease that applies to vehicles. The structure is the same, but there are often unique clauses and limits in the contract that relate to vehicles.

One major point is that contract hire agreements usually restrict your usage through mileage limits. If you exceed this limit (or break other terms of the agreement), you can expect to pay a penalty.

 

The key benefits of asset finance

Asset finance is playing an increasingly important role in the growth of British businesses. The British Business Bank reported record rates of asset finance lending in 2023 and the FLA estimated £37 billion of new asset finance lending in the year to June 2024 (a 7% increase year-on-year).

Beyond the direct impact on growth, there are several other benefits to asset finance that make it so valuable to Britain’s SMEs.

Improved cashflow management 

Asset finance helps business owners manage their money for the good of the entire business.

Buying an asset on finance means the business gets to keep more of its cash. Spending 10% of an asset’s cost on a hire purchase deposit means the remaining 90% can be used elsewhere in the business – on other investments, staff and benefits or anything else.

Strong cash reserves can help your business prepare for emergencies, move quickly when unexpected opportunities arise or simply earn a great return in savings accounts. 

Access to better equipment 

If the only way to buy new equipment was by paying for it outright, growth in the UK would flatline.

Asset finance gives SMEs the keys they need to unlock their potential, adding new and better equipment to their operations so they can grow beyond where they are today.

Tax advantages 

The tax advantages of asset finance depend on the terms of each arrangement, but many SMEs find these loans can have a positive effect on their tax and accounting positions.

Some of the more common tax advantages businesses find with asset finance include:

• Accounting for depreciation 

• Expensing interest payments 

• Claiming back VAT

Enhanced budgeting and planning 

Turning a big purchase into a set of regular repayments is great news for your financial planning. The same amount, paid on the same date, every month – it’s exactly what you want when managing finances and forecasting.

 

How to select the best asset finance solution for your business 

If you’re trying to determine which asset finance option will be best for your business, a little research will make the process a lot easier.

Following the two steps below will help you narrow down your options, so you can make the best choice from what’s realistically available to you.

Choosing your type of loan 

Deciding between a hire purchase, operating lease and finance lease (among other options) comes down to the type of asset you want and how you intend to use it.

You might use a hire purchase to buy a business-critical piece of machinery. Whereas for a piece of equipment that helps complete a specific project but won’t be used much afterwards might be better suited to an operating lease.

The specifics of your situation will dictate the best choice for you, so you might first want to discuss your options with your accountant, bank relationship manager or even an asset finance broker.

Choosing your lender 

When deciding who to arrange your asset finance with, there’s more to it than just picking the one that offers you the lowest interest rate (though that is one element to consider).

You have a wide market to choose from, including:

• Traditional banks 

• Challenger banks 

• Sector specialists 

• Asset type specialists 

• Building societies and credit unions

Each of these will have its pros and cons, which you’ll need to compare against what’s important to you in a lender. You might need the longest term possible or you might want to know there’s always someone helpful who’ll pick up the phone when you call.

 

Why choose Allica for your asset finance? 

At Allica Bank, we can offer Britain’s established business finance for hard, medium and soft assets up to £1 million.

Minimum loan	Maximum loan	Maximum advance	Maximum term	Documentation fee
£25,000*	£1,000,000	100%	7 years	£295

* For sole traders and partnerships, the minimum loan is £25,001. 

Numbers don’t tell the whole story, though. As well as the figures listed above, we pride ourselves on: 

• Quick turnarounds 

• Making things easy to understand 

• Real human support and expertise

You can learn more about what we offer on our asset finance page, including a full tariff of fees and some of the advantages of our loans. 

Asset finance fuels Britain’s businesses

The growth of British SMEs is in no small part due to asset finance. Without these loans, businesses would struggle to grow to the next level – stuck at maximum capacity but not able to grow beyond it.

As with any financial product, there are risks involved and some less positive stories to tell. You have to have a good reason to apply for asset finance and you need to be sure you can meet your repayments.

If you do feel like you’re in a good position to buy new assets on finance, then we’d love to see if we can help.

Enquire about asset finance

Links were live and information was correct at the time of publishing.