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What Is Asset Finance?
Learn about the types of asset finance available, which (if any) are suitable for your particular business and the pros and cons of using this method of business funding.
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Asset financing grew 7% in 2023 and accounted for 40% of gross external business lending (£21.9 billion of £55.3 billion in gross lending).
Asset finance lending data from 2023 also indicates the book total book size of the asset finance industry rose to £44.5 billion in 2023.
Asset finance is used in approximately 40% of business investments in vehicles, machinery and equipment. But, like other funding types, there are multiple asset finance options available for UK companies – here’s how to identify which is right for you.
What Is Asset Finance?
Asset finance makes it quick and easy for businesses to access new resources, either by arranging to pay in installments (asset finance) or by releasing cash from existing equipment by selling it to a finance provider and agreeing to lease it back off them instead (asset refinance).
For example, a manufacturing organisation may source a way of affording bigger, better machinery, paying it off in chunks until ownership is complete. Or a software company may raise additional income from selling its computers to an asset finance provider, like Close Brothers, before renting the hardware for an agreed amount of time.
In either case, asset financing is typically used to help businesses afford big ticket items, which they couldn’t afford to buy outright when needed.
What Is An Asset?
The term ‘asset’ has quite a broad meaning, and its definition will vary from business to business. Essentially, an asset is something of value your organisation owns and could potentially convert into cash. This could be fleet cars and other commercial vehicles, IT infrastructures or various types of machinery.
What Sorts Of Assets Can Be Financed?
Asset finance companies are becoming increasingly open in terms of what they will offer finance for. Traditionally though they use the ‘DIMS’ model to determine what qualifies as an asset.
‘DIMS’ stands for Durable, Identifiable, Moveable and Saleable. If an asset fits these criteria, then lenders are happy to finance the purchase. If it does not fit the DIMS criteria, it’s unlikely (though not necessarily impossible) you will be able to receive money against it.
More specifically, assets are divided into 2 types: hard assets and soft assets.
Hard Assets
Put simply: if it can drip oil, it’s a hard asset. Within this, vehicles and machinery are the most common examples of hard assets financed today. Any type of vehicle can be procured with asset finance, including:
- Company cars
- Light or heavy goods vehicles
- Buses and coaches
- Tractors and other agricultural vehicles
- Heavy plant equipment like bulldozers and excavators
The types of machines that can be financed include:
- Engineering equipment
- Manufacturing equipment
- Printing presses
- Recycling equipment
Soft Assets
Soft assets should not be confused with intangible assets. Whilst intangible assets (e.g. company brand, goodwill and technology patents) do carry significant value for a company, they do not appear on the balance sheet and therefore cannot be included in asset finance.
Instead, soft assets can describe anything that fits the DIMS criteria but falls beyond the scope of a hard asset. Some examples are:
- IT hardware and software
- Audio visual equipment
- CCTV systems
- Furniture and fittings
- Office equipment
If you’re thinking that these soft assets would have a lower value than hard assets, you’d be right. However as businesses increasingly move towards relying less on hard assets – and leverage technology to build their business, e.g. Uber – soft asset finance is becoming more popular.
Types Of Asset Finance
There are several types of asset finance available. The list below is based on one of the leading providers in the UK, Close Brothers Asset Finance.
Hire Purchase
If you’ve ever bought a new car on finance, you’ll already know how this type of funding works: the business secures the asset they need by agreeing to pay a fixed monthly amount, over the term of the agreement.
Of course, there may be a large payment required up front, but you should also have the option to purchase the asset outright at the end of the term, for another one-off payment – this is sometimes referred to as a ‘balloon payment’.
The main advantage of hire purchase is that you are considered to be the owner of the asset from the start of the term, meaning you can offset payments against pre-tax profits and claim back VAT on repayments.
Finance Lease
If you prefer to be more flexible – and are comfortable not to be working towards full ownership of the equipment you’re using – a finance lease allows you to access the asset quickly by renting it from your asset finance provider.
Rental periods and payments can be set up in a number of ways and you have plenty of options at the end of the term: you can choose to take out a second term, return the asset to the finance company or sell it and keep a portion of the value.
Operating Lease
Sometimes you only need access to new equipment for a short amount of time. If this time is significantly less than the ‘useful life’ of the asset, an operating lease will let you have use of the equipment when you need it, without having to pay anything upfront. This comes with the added benefit of no long term commitment and often requires lower monthly payments than a finance lease.
Asset Refinance
Do you already have assets in your business that you can leverage for cash? Asset refinancing helps you access the capital tied up in existing equipment, without needing to sell them.
Instead, your asset finance provider will purchase the asset from you and then rent it back over an agreed term. At the end of the term, the asset is yours again.
You can use the capital to fund other asset finance purchases, other investments or to help with cash flow.
Typical Amounts You Can Raise With Asset Finance
You can get asset finance for anything from £5,000 up to £20 million, but rates and repayments will vary depending on your circumstances, the value of the asset and the term of the agreement.
What Type Of Business Is Asset Finance Best Suited To?
Really any business can take advantage of asset finance to help them grow. The question is: which type of asset finance is right for you? The answer will depend on what type of asset you are looking to finance, and why.
Pros And Cons Of Asset Finance
| Pros | Cons |
|---|---|
| More flexible and cost-effective than getting a bank loan to purchase equipment | More expensive over the long term than buying an asset outright |
| Offset payments against pre-tax profits | You cannot offset the entire value of the equipment |
| Fixed repayments make cash flow more predictable | Missing repayments means you could lose the use of the asset |
| Access the resources or equipment your business needs quickly |
FAQs
Yes, asset finance is regulated, albeit more loosely than other forms of business loaning. Make sure that your lender is regulated by the Financial Conduct Authority, and you shouldn’t get any nasty surprises. And always read the small print, too.
An asset finance broker is an individual or company that steps in to help you find a suitable asset finance deal. They will normally earn a commission if you sign up with them.
Asset finance lenders will view anything that you own as an asset for security against a loan, as long as it meets the DIMS criteria and has measurable value.
With financing you have the option of keeping the asset at the end of the agreement, or retaining part of its value. Lending simply allows you access to something without owning it.
Close Brothers are a leading asset finance company in the UK, offering all the asset finance options we discussed above.
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