Asset Finance

Asset finance is a fast-growing funding choice for UK businesses. With asset finance, a company uses its assets as security to borrow money or take out a loan against what they already own – making it easier to acquire, use, and benefit from big-ticket items such as company cars, vans, plant machinery, and IT hardware and software. Instead of paying one large sum upfront, businesses can spread the cost over time with smaller, regular payments. This allows companies to use the assets as they pay for them, reducing pressure on cash flow. Alternatively, businesses can leverage the high-value items and intangible soft assets they already own as collateral for loans to support their growth.

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What is asset finance?

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Asset finance is a funding option that allows businesses to grow by acquiring much-needed equipment such as vans, machinery, aircraft, and IT hardware/software. The company pays an agreed amount over a set period, giving them faster access to the asset without the need for an upfront purchase.

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When businesses need assets but don’t want to make large upfront payments, asset finance spreads the cost over time through smaller, regular payments during a fixed term. Fees and interest are added to the cost of the asset, which can be used throughout the term. Common examples of asset finance include equipment leasing and hire purchase.

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Depending on the type of asset finance chosen, responsibility for maintenance (repairs, insurance, etc.) may lie with either the business or the finance provider. At the end of the term, the asset may be returned to the provider or ownership may transfer to the business.

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Alternatively, asset refinance can unlock the cash value of assets or intangible soft assets a business already owns by using them as collateral for a loan.

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What is an asset?

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An asset is a property—either tangible or intangible—that holds intrinsic value. Typical examples include buildings, vehicles, equipment, patents, and copyrights. Businesses often use assets to support their operations, but they can also be used to secure loans or pay off debts.

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What is a soft asset?

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Soft assets are intangible assets that play an essential role in business management but do not have a physical form and are harder to value. They can be just as important as hard assets and sometimes exceed the worth of physical assets.

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Examples of intangible soft assets:

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• Intellectual property, like copyrights, patents, and trademarks

• Future tangible assets, such as mining rights and oil permits

• Brand value and recognition, including logos and symbols

• Customer data and loyalty programs

• Goodwill, associated with a company’s reputation and stakeholder relationships

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What types of asset finance are there?

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Hire Purchase (HP): This allows businesses to purchase assets through instalments. At the end of the payment period, the business owns the asset outright, although the provider retains ownership until the final payment is made. Businesses are typically responsible for the asset's upkeep.

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Finance Lease: In a finance lease, a leasing company buys the asset and rents it to the business. Payments are made over a "primary rental period" until the cost of the asset is covered, plus interest. The business has options at the end of the lease: extend the rental, return the asset, or sell it on behalf of the leasing firm.

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Equipment Leasing: Like finance leasing, equipment leasing provides an option to purchase the equipment at the end of the lease term. During the lease, the finance provider is responsible for maintenance. At the end of the lease, businesses can extend the lease, return the asset, upgrade, or make a balloon payment to own it.

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Operating Leasing: This type of lease is typically used for specialist equipment needed for a short or medium term. The asset is rented for a limited time, with regular payments made while in use. One advantage is the ability to upgrade equipment during the rental period. The provider is responsible for maintenance, and costs are often lower due to the shorter rental period.

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Asset Refinance: Asset refinance comes in two forms: either by using assets as collateral for a loan or through sale and hire purchase back, where a company sells an asset to a finance provider and then leases it back. This arrangement releases capital for immediate use while allowing the business to continue using the asset.

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Contract Hire (Vehicle Asset Finance): Businesses can lease vehicles and outsource fleet management through contract hire. The provider sources and maintains the vehicles, and the business makes regular payments over the lease term. At the end of the lease, the provider disposes of the vehicles.

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How does asset finance work in the UK?

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Asset finance is a key driver of the UK economy, with record growth in recent years. The ability to spread payments over time while benefiting from the asset makes it a popular choice. Monetae partners with a wide range of asset finance companies in the UK, helping businesses find the best providers to meet their needs.

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What are the advantages of asset finance?

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Pros:

• Small or zero upfront costs for large purchases

• Spreads the cost over time

• Supports cash flow and business growth

• No need for extra collateral (the asset is the collateral)

• Potentially lower interest and fees due to asset security

• In some cases, maintenance costs are borne by the provider

• Capital is freed for other uses within the business

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What are the disadvantages?

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Cons:

• Ownership remains with the provider until full payment is made

• Failure to keep up with payments can result in repossession

• Contracts are typically long-term (minimum one year)

• The business may be liable for damages or limitations beyond the agreement

• Usage restrictions, such as vehicle mileage, could result in extra fees

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Can soft assets be financed like hard assets?

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Yes, soft assets backed by legal rights or future income streams can be financed. However, due to the difficulty in valuing soft assets, traditional lenders may be hesitant. Soft asset finance offers tailored solutions for businesses that rely on intangible assets like intellectual property and customer data. Benefits include:

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• Preserving cash flow

• Flexible repayment terms

• Expert valuation of soft assets

• Facilitating growth and innovation

• Unlocking hidden value in intangible assets

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Can my assets be repossessed?

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Yes, as with any secured loan, the asset provided as collateral may be repossessed if the business defaults on the loan or breaches the contract terms.

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Example of asset-based financing

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An engineering firm may use its valuable machinery as collateral to secure a loan, allowing the company to expand without selling the equipment. The machinery continues to be used while the loan funds are repaid. Once repaid, ownership of the machinery returns to the company.

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Asset-backed financing in Islamic banking

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Islamic banking prohibits interest-based transactions, so all financing must be asset-backed. In this system, a financier buys the asset and rents it to the business, with the business repaying the asset's cost plus a margin. This structure complies with Shariah law, and all asset finance follows these rules.

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What is short-term asset finance?

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Short-term asset finance provides loans or leases for periods of less than 12 months. This can fill cash flow gaps or provide equipment for a limited period to meet business needs.

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Asset-based refinancing vs. factoring

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Factoring involves selling accounts receivable to a lender, while asset-based refinance uses physical assets as collateral for loans. Both methods have distinct benefits and risks.

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The risk of funding long-term assets with short-term liabilities

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Maturity mismatch occurs when a business funds long-term projects with loans that need repayment sooner than the project generates income. This can create financial instability. It's crucial to match loan terms with the timeline for asset-generated income.

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What are the rates?

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Asset finance rates depend on the deal but tend to be lower than unsecured business loans. Interest rates for hire purchase and leases can range from 3% to 50%, depending on the creditworthiness of the business and the type of asset.

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Can I get asset finance with bad credit?

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Yes, especially if the loan is secured by high-value assets. The lender will assess both the value of the asset and the business’s ability to make repayments.

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Can a small business/startup get asset finance?

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Yes, asset finance is a practical option for small businesses and startups, as the asset itself acts as collateral. Businesses can access the essential equipment they need without tying up cash in large upfront purchases.

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How much can I borrow?

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Monetae works with lenders offering loans from £10,000 to £10 million. The amount will depend on the business’s strength, the asset being purchased, and its value.

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Is asset finance regulated in the UK?

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Yes, since 2018, UK asset finance agreements follow The Standards of Lending Practice, regulated by the Financial Conduct Authority (FCA). These rules ensure protection for business customers.

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Is my business eligible?

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If your business can meet its financial obligations, asset finance may be available to you. Whether you're a sole trader, partnership, or limited company, Monetae can help you find the right type of asset finance to meet your business needs.