What is asset finance?

How lenders use it

Asset finance is a family of products. With hire purchase, the business owns the asset after the last payment. With a finance lease, the lender owns it and the business pays rentals for most of its working life. With an operating lease or contract hire, the term is shorter, the lender takes the resale risk and often maintains the asset. Business contract purchase is hire purchase with a large final payment.

Asset refinance works the other way round. A business that already owns an asset sells it to the lender and leases it back, or borrows against it, to raise cash.

The lender assesses two things. First the asset: what it costs, how long it lasts, how easily it resells and how fast its value falls. Trucks and construction machines are easier to lend on than specialist or software-heavy equipment. Then the customer: accounts, bank statements, existing debts and whether the new payments fit, usually through the debt service coverage ratio.

The file a credit team needs is predictable. It holds the application, the supplier's invoice or quote, the asset's description and serial number, proof of insurance, recent accounts or management accounts, and bank statements. For a used asset the lender also checks title, so it does not fund an asset that is already financed elsewhere.

Worked example

Example only, not a quote. A haulage firm wants a £120,000 truck. On hire purchase it pays a 10% deposit of £12,000 and finances £108,000 over five years.

Before it agrees, the lender checks the price against the market, what the truck should be worth after five years, and whether the firm's cash flow covers the monthly payment with room to spare. It asks for the dealer's invoice and the truck's registration before it pays the dealer.

Common confusions

Asset finance is not the same as leasing. Leasing is one type of asset finance. Hire purchase is the other big one, and the difference is who owns the asset at the end.

Asset finance is not asset-based lending. Asset-based lending usually means one facility secured on a company's receivables, stock and machinery together, often alongside invoice finance. Asset finance funds a named asset.

The rules depend on the customer. Lending to sole traders and small partnerships can fall under consumer credit rules on smaller agreements, while most lending to limited companies does not. Lenders confirm the customer type first.

Questions lenders ask

Is asset finance the same as leasing?

No. Leasing is one kind of asset finance. Hire purchase, refinance and business contract purchase are others. With a lease the lender keeps ownership, and with hire purchase the business owns the asset after the final payment.

What assets can be financed?

Most physical business assets with a resale value: vehicles, trucks, construction and farm machinery, manufacturing equipment, medical equipment and IT. Lenders prefer assets that hold their value and are easy to identify and recover.

What does a lender check before approving asset finance?

The asset's price, condition, expected life and resale value, the supplier, and for a used asset that nobody else has a claim on it. Then the business: accounts, bank statements, existing debts and whether it can afford the payments.

What is asset refinance?

Raising cash against an asset the business already owns. The business sells the asset to a lender and leases or hires it back, or borrows against it. It suits businesses that own valuable equipment and need working capital.

Hire purchase vs lease: Who owns the asset at the end
Residual value: What an asset is expected to be worth at the end of the term
Debt service coverage ratio: Cash earned against loan payments due
Personal guarantee: An owner's promise to repay if the company cannot

This page is general information for lenders. It is not legal, tax or credit advice.