Asset Finance emerges as new source of finance for UK business owners

Asset finance is a type of lending that gives you access to business assets such as equipment, machinery and vehicles, or enables you to release cash from the value in assets you already own.

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Asset Finance emerges as new source of finance for UK business owners

What is Asset Finance?

Asset finance is a popular method of borrowing money by using a company's balance sheet assets (inventory, account receivable) as security to take out a loan. It's recognised as a quick and convenient way to manage working capital for your business. The efficiency of working capital management can be quantified using ratio analysis.

Various assets can be offered as collateral, from cash to plant, machinery, and even buildings. For example, a food delivery company may use its vehicle fleet to secure finance against purchasing new premises or for new vehicles. The loan amount will be evaluated based on the value of these assets.

In general, there are two main types of asset finance. There is lending that is secured against existing balance sheet assets. Equipment finance is a loan or lease used to procure business equipment (any tangible asset apart from real estate.)

Depending on the type of asset finance, the borrower can take full ownership of the asset, return it to the lender or take out a lease on a newer model. 

Asset Finance includes:

Equipment Leasing

Equipment leasing can be an effective way to access expensive items your business needs to flourish. Leasing is essentially a method of renting an asset for a period of time — it's not permanent, and it can help many businesses get to the next level. We'll look at some of the key advantages and disadvantages of equipment leasing.

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Hire Purchase

Hire purchase is a way to buy assets by paying in instalments over time. With hire purchase, you legally own the item once all the instalments have been paid, but it will appear on your balance sheet at the start of the term in specific agreements.

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Operating Leases

An operating lease is an equipment lease where the customer (or 'lessee') rents an asset for a fraction of the item's useful life. An operating lease might also be known as a business contract hire, particularly for commercial vehicles.

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Asset Refinance

Asset refinancing has a few different meanings depending on the context. It could refer to: Using an asset as a security or loan. Asset finance combined with (or in addition to) other finance. Debt consolidation: refinancing business debt.

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How does asset finance work?

The asset finance industry is the backbone of the UK economy. The finance leasing and hire purchase of business assets from plant and machinery and agricultural vehicles to equipment and aircraft are growing at around 6% annually.

This increase can be explained by how expensive assets can be purchased and how it allows sole traders and limited companies to benefit from assets without paying for them up front and in full. This frees up cash for use in working capital and protects against asset depreciation meaning lower interest rates and fees.

What duration is asset finance for?

Asset finance tends to be provided for between one and seven years, which can be longer for more expensive assets. The asset finance company recuperates the asset's cost over an agreed period while benefiting from the accrued interest. 

The length of time the finance is provided for depends on the asset's useful life and the type of repayment structure agreed upon by both parties. As a borrower, you'll have to show that you can afford to make the agreed repayments. 

What is asset-based finance?

Some lenders are specialists in one area of asset finance, while other companies can finance almost anything that has a market value. There's a wide range of asset finance products on the market, and it can be a flexible arrangement. It provides a small business with working capital and cash flow by using accounts receivable, inventory, machinery, equipment, or outstanding invoices as collateral. In brief, it is any short term loan to a company backed by an asset on the balance sheet.

Asset-based finance is often used to pay for expenses when cash flow is limited or when debtor days (accounts receivable/annual credit sales) have increased unexpectedly. It can also be used for startups to secure a loan, asset refinancing, finance growth, or seek alternative funding options for expansion.

Advantages and disadvantages of asset finance

  • Faster access to money when compared to traditional bank loans

  • Fixed repayments aid cash flow management

  • Agreements have fixed interest rates

  • Failure to pay results in the loss of the asset, nothing more

  • Ideally suited to equipment leasing

Disadvantages of asset finance

  • There is a risk of losing an asset. 

  • The value of the assets may decrease with the possibility of low valuations.

  • It's not as well suited to long term business finance.

  • Asset finance can help small businesses, but it's important to talk to an advisor for a financing method tailored to your business model.

What is an asset finance platform?

An asset finance platform like Funding Options helps businesses access asset finance by matching them with a lender that meets their unique funding requirements.

Is asset finance regulated?

The Financial Conduct Authority (FCA) covers financial services providers for certain regulated activities, including car hire purchases. General business asset finance isn't classed as regulated by the FCA.

However, many asset finance lenders are FCA-authorised and regulated, and these firms are likely to have rolled out the same processes and practices across their organisation.

Is my business eligible? 

If you have a business that can meet its financial obligations, yes. Whether you are a sole trader, a partnership, a limited company, or a start-up - there are many kinds of [asset finance] available with a lender to suit every business need. 

How can I get asset finance?

Discovering the best asset finance options with the most competitive rates and the ideal lender can be time-consuming and complicated. 

However, through our award-winning, innovative and data-driven platform, Funding Cloud™, we can offer speed and certainty for SMEs through a real-time, centralised and two-sided marketplace delivering instant decisions and firm offers from lenders.

Register free today with Funding Cloud™ and connect your business to lenders and partners to facilitate fast, accurate and secure funding at scale. 

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