Asset finance lets a business use equipment, vehicles, machinery or technology while paying for it over time, rather than funding the full cost from cash. The asset itself usually forms the main security for the agreement, which is one reason asset finance can sit alongside other borrowing in a business.
There are several types of agreement, and they differ in one important way: who owns the asset, and when. Understanding that difference makes it easier to compare quotes and choose a structure that suits how long you plan to keep the asset.
The main types of asset finance
Hire purchase
With hire purchase, the finance provider buys the asset and the business pays for it in instalments over an agreed term. The provider owns the asset during the agreement. Once all payments have been made, including any final fee set out in the agreement, ownership typically passes to the business.
Hire purchase often suits assets you expect to keep for most of their working life, such as machinery you plan to run until it is worn out.
Finance lease
Under a finance lease, the provider owns the asset and rents it to the business, usually for most of its working life. The business is generally responsible for maintenance and insurance. Ownership does not normally transfer to the business. At the end of the main term, options can include continuing to rent the asset or arranging its sale, with the business receiving a share of the proceeds, depending on the agreement.
Operating lease and contract hire
An operating lease is a rental for a period shorter than the asset's expected life. The provider owns the asset, carries the risk on what it will be worth at the end, and the business returns it when the term finishes. Contract hire is a common form of operating lease for vehicles and may include maintenance. Usage limits and condition requirements usually apply.
Asset refinance
Asset refinance releases cash from assets the business already owns. Depending on the structure, the provider may buy the asset and lease or sell it back to the business, or lend against it. The business keeps using the asset while it repays. Some businesses use refinance to raise working capital or to restructure existing agreements.
Deposits, balloons and regular payments
Some agreements require an upfront deposit or advance payment. Whether one is needed, and how much, depends on the provider, the asset and your circumstances. A larger deposit generally reduces the amount financed.
A balloon is a larger final payment at the end of the term. It lowers the regular payments but leaves a bigger sum to settle, refinance or cover from the sale of the asset. If you choose a balloon, plan how you will meet it from the start rather than near the end.
When comparing quotes, look at the total amount payable, not just the regular payment. Check what fees apply at the start and end of the agreement, what is included, and what happens if you want to settle early.
Want to know which options may suit your business?
How providers assess asset finance
Asset finance providers usually look at both the business and the asset. On the business side, they typically review trading history, recent accounts, bank statements and existing commitments. Directors are often asked for personal guarantees. Our guide to what business lenders look for covers this in more detail.
On the asset side, providers consider what it is, whether it is new or used, how well it is likely to hold its value and whether it could be resold. Assets with an established resale market are often easier to finance. Specialist or heavily customised equipment can be harder to fund, though this varies by provider.
A commercial finance intermediary such as Emirex Finance can help you understand how different structures compare for the asset you need. For a practical, vehicle-specific view, see how to finance new vans and trucks.
Tax, VAT and accounting treatment
Hire purchase, leases and refinance can be treated differently for tax, VAT and accounting purposes. VAT may be handled differently depending on the type of agreement, which can affect cash flow at the start. The right treatment depends on the agreement and your business's circumstances, so speak to your accountant before you commit.
Key points
- Hire purchase usually leads to ownership at the end, while finance leases and operating leases generally do not.
- Asset refinance can release cash from assets the business already owns.
- Deposits and balloons change the regular payment, but you still need to plan for the full amount payable.
- Tax and VAT treatment depends on your circumstances, so take advice from your accountant.
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This guide is general information, not financial, legal or tax advice. Finance is subject to status, eligibility and approval by the relevant finance provider. Emirex Finance works with UK limited companies only and is not authorised or regulated by the FCA.