Asset finance
Purchasing new equipment that needs funding? Asset rich but cash poor and need to release some capital? Asset finance could be the answer to help your business acquire essential machinery or borrow working capital.
What is asset finance?
Asset finance offers an accessible and flexible way for your business to buy new equipment or borrow money.
In simple terms, asset finance involves using assets within your business to secure a loan.
These can be new assets such as vehicles, machinery or computer equipment that you need for your business.
They can also be assets that you already own, and which have not yet been pledged as security for a loan.
Thoughts from Matt
“Asset finance can offer your business a cash injection when you most need it. It is often a great option for new companies that have no trading history but can show financial strength through asset ownership, and for those without the deep pockets required to purchase large machinery or expensive equipment.
Contact us today to see how asset finance can be used to help your company grow or branch into new areas.”
Matt Haycox
Founder and CEO, Funding Guru
Types of asset finance
There are three ways that companies typically use asset finance: A lease purchase, Hire purchase and Asset refinance
Below we cover these three uses in more depth.
Lease purchase
This is a leasing arrangement between you and a leasing company. You get access to new equipment by renting (leasing) it for a set period of time.
For the duration of the agreement, your company has exclusive usage rights but ownership remains with the lender. This is where a lease purchase differs from a hire purchase, as the business will never take ownership of the asset, they will just have the usage rights.
The benefit is that you don’t have to spend a hefty amount on equipment that you may only need for a short period. By leasing the equipment, you have more financial flexibility.
There will likely be the option to add maintenance and insurance in your payments.
VAT is payable on each monthly instalment.
Used correctly, leasing can be effective in reducing your corporation tax bill.
The total lease payments can be offset against profit, saving you corporation tax of 19% or 25% from April 2023.
If you were to buy outright, you could only claim capital allowances for the cost of the item and write off depreciation in value from corporation tax.
If you were to buy through hire purchase, you can only write off the loan interest (we cover this in more detail below).
Hire purchase
With hire purchase, a finance company such as Finance Guru will purchase equipment or vehicles on your behalf and you will repay the money over an agreed timescale.
Like the lease option, it means a business can access new assets without having to buy them outright. The difference is that you own the asset at the end of the agreement.
Your company will make regular payments until the asset is paid off in full (typically a maximum of 60 months).
Hire purchase is particularly suitable for companies looking to acquire vehicles, machinery and other expensive commercial equipment. It is a great option for companies looking to increase their assets without their cash reserves taking a significant hit.
As a lender, we will arrange fixed monthly payments to suit you. This makes it easy for you to incorporate the repayments into your future cash flow forecasts.
Hire purchase is easily accessible to a wide range of businesses, so for SMEs it can be a great way to boost what your business can offer.
You can deduct interest payments from your corporation tax bill, but unlike finance lease you cannot deduct the total monthly repayments.
However, with hire purchase you can take advantage of the government’s annual investment allowance, thereby reducing your corporation tax bill. The government has more guidance here on what qualifies for the annual investment allowance.
There can therefore be valuable tax incentives from both finance lease and hire purchase.
Meanwhile although you can spread the cost of an asset over time through hire purchase, the full VAT bill is due upfront.
So if you buy an asset costing £15,000, you would owe £3,000 in VAT.
But as long as the asset is strictly for business use, the VAT can be reclaimed in your next VAT return.
This table shows the pros and cons of finance lease vs hire purchase, and how they compare to buying outright.
Finance lease | Hire purchase | Buy outright | |
Who ultimately owns the asset? | The finance provider | The business | The business |
What happens at end of loan term? | Returned to the finance provider | The business keeps the asset | N/A |
When is VAT charged? | Each repayment | Initial purchase date | Initial purchase date |
VAT reclaimable? | Yes | Yes | Yes |
Monthly repayments | Fully tax deductible | Capital repayments not tax deductible, but interest is | N/A |
Can capital allowances be claimed? | No | Yes | Yes |
Offset depreciation? | Yes | No | No |
Insurance and repair responsibilities | Likely the business | Likely the business | The business |
Asset refinancing
If you already own high-value assets outright, you can offer these assets as security against a loan.
An asset finance lender – such as Funding Guru – loans cash to your business based on the value of that asset. If you default on the loan, the lender can take ownership of the asset to sell on and recoup their money.
The process is typically known as a ‘sale & lease-back’. This is where your business takes an asset it already owns and sells it to the funder. The funder will then simultaneously lease it back to you. You then make monthly payments to the funder just like in any loan situation.
It’s less complicated than it sounds and there are many benefits to a sale & lease-back, particularly as you unlock any capital the assets hold whilst still retaining use of them.
It can be a particularly good option for businesses with high value machinery and assets that have substantial equity in them and need to be retained for future use. Rather than losing the use of them, they can simply be used as collateral.
What assets can be bought using asset finance?
Finance providers have different rules about what assets they will and won’t fund, and how much they will lend against them.
At Funding Guru we consider all assets, as long as the business case makes sense and we can see you are a reputable borrower.
Below are a few examples of business assets you could acquire through asset finance:
Coffee machines for a restaurant chain
Computer equipment in an office
A fleet of vehicles so you transport goods
Intellectual property, including patents and trademarks
Medical equipment for a healthcare provider
How popular is asset finance?
Asset finance is growing in popularity, as businesses look to free up more cash flow during the current economic uncertainty.
The latest figures from the Finance & Leasing Association (FLA) show that total asset finance grew to £2.8bn in the month of November 2022, up by 12% compared to November 2021.
The table below shows the most popular reasons for using asset finance:
Amount loaned in Nov 2022 | Change on Nov 2021 | Annual total to Nov 2022 | |
Car finance | £884m | +35% | £9.2bn |
Commercial vehicle | £810m | +10% | £8.7bn |
Plant and machinery | £590m | -4% | £7.7bn |
Business equipment | £156m | +13% | £1.98bn |
IT equipment | £98m | +33% | £1.53bn |
Aircraft, ships and rolling stock finance | £30m | +205% | £333m |
Total FLA asset finance | £2.803bn | +12% | £32.8bn |
How much can I borrow with asset finance?
This will depend on the lender. At Funding Guru, we typically allow companies to borrow from £25,000 to £500,000 over a period of 12 months to four years.
We aim to make a funding decision within 24 hours, and the money can be paid to the supplier or in your account within two business days.
Pros of asset finance for equipment purchase or lease
- No limitations on how you use the money
- Fixed interest rate and no hidden fees
- An option for companies with tricky financial histories
- Weekly or monthly repayments
- Tax savings: Lease payments are a business expense and fully deductible from your profits for corporation tax purposes.
- Boosts your cash reserves
- Easy to access, as the asset acts as collateral
Cons of asset finance for equipment purchase or lease
- Your company may not effectively use the assets, meaning you end up paying for equipment you don’t use
- Some loan terms have the ability to change the interest rate during the agreement
- You may not keep up with the repayments, which could leave a mark on your credit report
- Asset financing terms are typically over a year, so there is not a short-term repayment option
- If you damage the equipment, you may be liable for replacement or repair costs
Which type of asset finance is right for my business?
Asset finance is very flexible, and is particularly popular among industries using vehicles, machinery or equipment.
Funding Guru have provided finance for a whole host of equipment including cutting edge printing machinery, vehicle fleets, horseboxes, scaffolding and everything in between.
If you’re looking to acquire an asset, we’ll look to understand the type of asset, whether you want to own it outright at the end of the loan period, and whether you’d like maintenance and insurance included in your payments.
If you’re asset rich but cash poor, we can help you to release the capital in assets you already own.
Contact Us
Contact us online or speak to one of our advisers to apply for Asset Finance.