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What is asset financing (and leasing)?

Asset financing and leasing can help businesses spread the cost of the equipment, machinery, and vehicles they need to operate, expand and grow.
But what is asset financing and what are the benefits of this approach to business financing?

What is meant by asset financing?

Asset financing is a type of business finance that allows businesses to access the assets and equipment they need, without the initial capital investment. Instead of buying the equipment outright, you will pay in regular instalments over an agreed period of time.

Asset finance can be applied to assets such as equipment, machinery and vehicles. It can also be used to release cash that is tied up in existing assets.

How does asset-based financing work?

With asset financing, businesses take out finance through an asset finance provider, equipment provider or broker. The agreement is usually set at a fixed interest rate, and the loan is paid back to the provider over an agreed set timeline.

When you reach the end of the agreed term, you will have the option to own it, buy it, continue to lease it or return it, depending on the type of asset finance you chose.

With hire purchase, for example, you will own the equipment or asset once you have paid all the instalments. On the other hand, with equipment leasing, you never actually own the asset – at the end of the lease, you can choose to extend the lease, pay the remaining balance so you own it, upgrade to a new model or return it to the lender.

As with any type of business finance, you will need to show that your business can afford to make the repayments during the terms of the lease. Terms can be negotiated based on business need, however, they are typically between two and five years, reflecting the lifecycle of the equipment.

What are the advantages of asset financing?

Asset financing offers a number of benefits for businesses looking to acquire or upgrade equipment, including:

Access to new equipment

Asset financing allows businesses to access new equipment that they might not otherwise have been able to afford. This supports efficiency, expansion and growth.

Flexibility

In comparison to more traditional types of finance (such as bank loans), asset financing and leasing are typically much more flexible. Although asset finance lenders still have their own lending criteria, they tend to judge each application individually, on its own strengths.

Cash flow

One of the key benefits of asset financing is that payments are split over an agreed term. This frees up working capital and boosts cash flow.

Tax benefits

Asset finance and leasing can help reduce a business’ corporation tax liabilities.

No depreciation

Equipment and other assets often depreciate over the short term, reducing their value. With asset financing, the business passes the risk of this depreciation onto the lender.

Are there any drawbacks to asset financing and leasing?

As with any type of financing, there are drawbacks to consider if you’re thinking about buying equipment through asset financing. These include:

  • You don’t own the asset
  • You may have to pay for maintenance or damage if not covered in the terms of the agreement
  • Terms are usually a year or more

Find out more about the different types of asset financing here.

Who is asset financing and leasing for?

Asset financing and leasing are used by businesses of all types and sizes. It is ideal for businesses who want to access high-value equipment to help grow their business but spread the cost over an agreed term.

What is asset leasing?

Asset leasing is a type of asset financing that allows businesses to borrow an asset for an agreed period, rather than buying it outright and owning it.

With this type of asset financing, the provider buys the asset your business wants and then rents it out to you. They will own the asset and will take care of all maintenance and service costs for the duration of the lease.

At the end of the term, you will usually have the choice to return the equipment, continue to lease it or return it.

What are the types of asset leasing?

There are three main types of asset leasing:

  • Finance leasing
  • Operating leasing
  • Contract hire

Finance leasing

This is a long term lease over the expected life of the equipment, usually three years or more. The finance provider covers the full cost of the equipment throughout the lease. Although you won’t own the equipment, you will be responsible for maintaining and insuring it.

Operating leasing

Operating leasing is ideal for businesses that don’t need the equipment for the duration of their working lifespan. At the end of the lease, the provider will take back the asset, and they will be responsible for the maintenance and insurance of the equipment during the term of the lease.

Contract hire

This type of asset leasing is typically reserved for company cars, rather than equipment. The leasing company will usually take some responsibility for the management and maintenance of the vehicle.

Is asset financing the same as hire purchase?

Hire purchase, also known as lease purchase, is a type of asset finance. It is similar to asset leasing but simpler. Rather than leasing an asset, a hire purchase is more like buying equipment outright, only the cost is paid for in instalments rather than upfront. You will usually have to pay an initial deposit.

Unlike with asset leasing, when you acquire an asset through hire purchase, your business will own and be responsible for the item. 

Here at CHG-MERIDIAN, we can help you stay ahead of your competition with tailored asset finance and leasing solutions that keep you on top of the latest IT, healthcare and industrial technologies. If you want an effortless way to promote, inform or share your content, get in touch today.