What is asset finance? The complete guide

Every business in operation today has assets of some kind. From a sole trader using a laptop to a manufacturer with millions of pounds worth of machinery, assets are, to put it simply, the tools of our trade.

Not all assets carry equal weight in your business though. Replacing the kettle in your office and buying a brand-new piece of machinery to double your production capacity are very different kinds of expense.

Asset finance can bridge that cost gap and make it possible for businesses to invest in their tools and equipment.

Whether you’re nearly ready to apply for asset finance or just researching what it all means, this article should answer all of your questions about this common type of lending.

 

What is asset finance?

Asset finance is a broad term for loans that help you buy equipment, tools, vehicles and other resources for your business.

Most asset finance is comparable with a mortgage. In essence, the lender buys the asset for you and you pay it off month-by-month (with interest). At the end of the repayment term, you own the asset outright. The loan is secured against the value of the asset, so if you can’t pay it back, the lender will keep the asset.

There are variants of asset finance that work in different ways. We’ll explain the different types a little further into this article.

Overall, it can offer a solution to getting the equipment you need in an affordable way. You can grow your business without saving for years and years to afford it, nor do you need to risk your cash reserves on one large investment.

 

The importance of asset finance in business

New assets can be expensive and therefore challenging for businesses to buy outright. This can result in a catch 22: your business can’t grow without new equipment, but you can’t afford to buy new equipment until you grow. Asset finance can help resolve this conundrum.

 

Types of assets that can be financed

Lenders group assets into three categories: hard, medium, and soft. Some lenders will only fund hard assets, while others (like Allica Bank) are happy to offer loans for all three kinds.

We’ve explained the differences between these categories below, along with adding some examples of each from assets we’ve funded. None of the lists below are exhaustive, so if you want to be sure about whether we can help finance an asset, let’s have a conversation.

Hard assets

Hard assets are the large, tangible objects used by your business. If a lender offers asset finance, they will almost always be able to fund hard assets.

These assets are typically quite costly and hold a fair amount of resale value.

• Commercial vehicles, trucks, trailers, cars, buses and coaches

• Plant and machinery, cranes, construction and industrial

• Print and packaging, CNC machinery, machine tools

• Waste recycling (eg. compactors or magnetic separators)

• Materials handling (eg. forklifts or pallet racking)

• Farming vehicles

Medium assets

Medium assets are usually tangible, physical objects – but with adaptations or intangible aspects that influence their value. They might have a decent resale value, but in a smaller market or with some modifications needed first.

• Equipment for: garages, textiles, waste, pumping, surveying and medical

• Portakabin and welfare units

• Compressors

• Traffic lights

• Robotics

• Surveying equipment

Soft assets

Soft assets are necessary for the operation of your business, but often have low or no resale value. They might be low value to begin with or bespoke for your business, making resale harder.

It’s common to see intangibles like intellectual property listed as a soft asset on a business’ balance sheet, but these aren’t relevant to asset finance.

• Equipment for catering

• IT equipment

• Security equipment

• Leisure equipment

• Telecoms equipment

• Scaffolding

 

The difference between asset finance and traditional business loans

 

Asset Finance is a more structured way for your business to borrow money in order to purchase much needed assets. In most cases the funding will be secured on the asset and therefore does not constrain precious working capital, helping your business to grow. 

That’s not to say that a lender will hand out blank cheques to anyone who asks. They’ll want to do their due diligence and lend within their risk appetite. The healthier and more established your business is, the better your odds of being accepted for asset finance.

 

Types of asset finance

As mentioned earlier, asset finance is a broad term. There are many different types of asset finance available to businesses. Let’s run through some of the more common types.

Hire purchase

The most common form of asset finance, with the borrower paying part of the cost of the asset upfront.

You might pay something like a 10% deposit on an asset, with your lender paying the remaining 90%. You will then repay that 90% to the borrower over a fixed term, including interest and any associated fees.

If you buy a piece of equipment with hire purchase and find it doesn’t help in the way you hoped, you’re still responsible for the repayments. It’s possible you may be able to sell the asset if you’re not happy with it, but it would require the lender’s agreement.

Finance lease

The lender buys the asset and loans it to the borrower, who pays the lender both a deposit and monthly fees to rent the asset for a fixed term. At the end of that term, if the borrower wants to continue using the asset they need to enter a secondary rental stage.

Operating lease

An operating lease is an agreement for borrowing an asset owned by a lender. To make the property comparison again, operating leases are more like renting than agreeing a mortgage. You borrow the asset, pay for it while you use it, then give it back. The advantage to the borrower is that the lender absorbs the loss in value of the asset due to depreciation as it ages. 

If you want to keep using the asset at the end of your lease, you can discuss renewing or arranging a purchase but you’re under no obligation to do so. Equally, the lender is under no obligation to agree to a sale or new lease.

Operating leases can make managing your cashflow easier and free you from the costs and effort of disposal in the future.

Green finance

Green finance helps businesses buy assets that improve their sustainability efforts.

Using Allica Bank as an example, we fund four assets under green finance terms:

• Solar panels

• LED lighting upgrades

• Air-source heat pumps

• Biomass systems

These deals come with unique maximum terms and loan values, as well as their own tariff of interest rates.

Asset refinance

Asset refinance is the process of borrowing money secured against an asset that you already own.

It’s a bit like remortgaging your house or a commercial property, in the sense that it unlocks equity from something you (at least partly) own.

You can use asset finance to restructure your existing borrowing, consolidating your debts and/or securing a lower interest rate.

 

How does asset finance work?

You arrange asset finance with lenders authorised by the Financial Conduct Authority, including banks, credit unions and specialist asset finance providers.

You can use an asset finance broker. These industry experts can find better deals than you might on your own, as well as helping with the application process, but their fees will add to your overall costs.

The basic steps you can expect to take are along these lines:

1. Research asset finance providers to find the best option for your assets, needs and cashflow. If you use a broker, your first step will be to contact them and explain what you’re looking for – they’ll then do the research for you

2. Make an application. The lender will then check to see if you’re credit worthy

3. Once they offer you terms, you sign and return all the paperwork

4. Take delivery of your asset and start using it. You’ll want to consider insurance, even if it isn’t a requirement of the lease

5. You’ll begin repayments according to the agreed schedule

6. Once your lease is complete, you’ll either have the option or obligation (depending on your contract) to take ownership of the asset(s). If not, you’ll return it to the lender

 

The key benefits of asset finance

Securing new assets for your business can kickstart a new phase of growth but there can be other benefits too.

Improved cashflow management

Not every business has enough spare cash to make a big asset investment outright. Asset finance gets you access to the equipment you need for a smaller cost, with regular and reliable repayments.

For example, a hire purchase that requires 10% of your savings as a deposit leaves you free to invest the remaining 90% elsewhere in your business. You could, for example, keep the remaining 90% of your savings in an interest-earning account and use it to help fund repayments on your asset.

Access to better equipment

Most business growth comes from scaling up volume and maintaining or improving quality. The equipment you start with can put a ceiling on your capacity for growth if assets wear out or become less effective than newer, innovative options that come to market. Improving your equipment raises that ceiling.

Asset finance can help you:

• Produce your product(s) faster

• Improve a process or increase efficiency

• Produce greater volumes of your product(s)

Tax advantages

Asset finance can deliver some tax advantages. While not groundbreaking, they’re well worth being aware of.

• Interest payments made on loans are tax deductible

• You can spread the cost over the lifetime of your lease

• Most plant and machinery purchases are eligible for the Annual Investment Allowance. (You can deduct the full value of an item that qualifies for AIA from your profits before tax - up to £1 million for all claims each financial year.)

Currently, leased assets aren’t eligible for full expensing – a super-deduction on most plant and machinery expenditure.

Enhanced budgeting and planning

The budgeting benefits of asset finance align closely with the cashflow benefits. Higher than usual expenditure for an outright purchase can make managing and planning budgets trickier compared to the regular payments common to the lifetime of a lease. Fixed terms mean you know exactly how far ahead to plan. 

Asset finance also keeps your established credit lines open for other purposes. These deals are secured against the value of the asset and not solely on the creditworthiness of your business, leaving your traditional borrowing facilities untouched. For example, using asset finance to buy a new van leaves any agreed overdraft facility untouched for emergency operating capital, such as buying a large amount of stock to fulfil a large order.

 

Choosing the right asset finance option

Your choice of lender and loan will depend on lots of factors. You’ll need to know whether they offer finance for the type of asset you want, what their interest rates and terms are, and what it’s like to borrow from them.

Some of the key features and costs you’ll need to be aware of include:

• Fixed terms (eg Allica lends for a maximum of seven years)

• Fixed interest rate (you’ll pay the same rate for the lifetime of the agreement)

• Minimum transaction value (lenders will only agree to a deal if it’s above a certain value)

• Standard documentation fee (covering the lender’s administrative costs)

• Purchase fee (to complete the transfer of ownership at the end of the agreement)

The broader point of discussion here is affordability. Lenders will check that you can afford the repayments, but you’ll need to do your own calculations and forecasts to be sure you’re comfortable with the ongoing cost of asset finance.

 

Asset finance with Allica Bank

As mentioned earlier, Allica Bank offers SMEs asset finance for all kinds of assets, from hard to soft.

Here’s a quick overview of what’s on offer with Allica Bank asset finance:

• Financing available for hard, medium, and soft assets.

• Green finance available for solar, biomass, LED lighting and air source heat pumps.

• Terms available up to seven years.

• Available for assets between £25,000 and £1 million.

• Dedicated relationship manager and direct access to UK-based support team.

• Straightforward process and clear communication.

• Fast decisions.

We’ve got a dedicated asset finance webpage where you can explore the finer details.

We have to make it clear that there are costs, fees and risks involved in any asset finance arrangement. You will be charged interest on the money you borrow and risk having your assets repossessed if you can’t keep up your payments. For our latest interest rates, check our Product Guide. For a tariff of fees, see our In Life Fees and Charges document.

 

Funding your future growth

If you’re looking at how to grow your business, you might consider asset finance at some point on the journey.

There are options for all situations and plenty of lenders out there, so the real crux of the matter is choosing the right combination of product and lender for you.

Assess the whole market and  consider working with a broker. You’ll also need to  work out what’s most important for your business  and what you can afford in repayments. From there, you’ll have an exciting new path ahead of you as your business starts operating with new assets.

Contact us to discuss asset finance today.