6 Types of Asset Finance – Finding the Right Solution

Types of Finance

Asset finance is a type of borrowing that allows you to spread the cost of business purchases . Funds can be used for a huge variety of high value items including equipment, furniture, technology, plant, machinery, vehicles or even glamping pods. Because the funds are secured on your purchase, rates are typically lower than for a standard business loan.

Asset finance takes 6 different forms, Hire Purchase (HP), Finance Leasing, Operating Lease, Equipment Refinance, Contract Hire, and Business Contract Purchase. Different types of asset finance may suit different business circumstances. We will help you invest in your business with solutions tailored to your needs.

Whilst we will guide you through the detail, understanding the different types of asset finance helps you make both informed and successful decisions for your business.

Making Business Investment Easier with Portman’s Asset Finance

Asset financing is a helpful tool for businesses to acquire essential equipment or machinery they need to operate. It allows businesses to spread the cost of these assets over time through leasing or hire purchase agreements, instead of paying a large sum upfront.

We understand that every business has unique needs and circumstances. We talk to over 25,000 businesses each year about their finance needs and we’re used to finding a way. Our experts will assess your goals to assess the asset finance solutions available to your business – from ownership-oriented options like Hire Purchase to flexible leasing plans. We’ll help you choose the perfect fit to align with your budget and business goals.

Key Benefits of Asset Finance

1. Preserve Cashflow – Invest in critical assets without draining your cash reserves, keeping funds back for emergencies. A lack of free cash can make you vulnerable to changes in the economy.

2. Spread Costs – Make the investment you need now, without the initial outlay, get what you need in order to build your business then repay in instalments whilst generating revenue.

3. Upgrade Equipment – Replace outdated equipment with newer, more efficient models, stay up-to-date with competitors, keep on top of trends, offer the latest services.

4. Improved Return on Investment – Newer, more efficient equipment through asset finance can lead to increased productivity and cost savings, ultimately improving your return on investment.

5. Tax Advantages (Consult Your Accountant) – Often, certain types of asset finance offers tax benefits such as Full Capital Expensing and claiming capital allowances. It’s important to consult with your accountant to determine if these advantages apply to your specific situation.

6. Flexibility for Growth – Sometimes capturing new opportunities, winning new customers or contracts means reacting to the market and the businesses that are most agile can be those that win. Asset finance allows you to quickly scale and flex your operation if you don’t have money put aside for capital investments.

7. Free Up Working Capital for Strategic Investments – Preserve your working capital for other strategic initiatives such as marketing campaigns, research & development, or expanding into new markets.

8. Simplified Budgeting & Forecasting – With predictable monthly payments, asset finance simplifies budgeting and forecasting, making it easier to plan for the future.

6 Types of Asset Finance Explained

1) Hire Purchase (HP)

A popular pathway to asset ownership

A hire purchase agreement provides businesses with a strategic method to acquire essential assets. In this agreement, a business essentially “rents to own” an asset from a lender. After paying an initial deposit and the VAT upfront, the business gains immediate use of the asset while making fixed monthly payments towards ownership.

Benefits of Hire Purchase

• Acquiring Essential Equipment – Hire purchase is particularly suitable for acquiring essential business assets that you definitely want to own like machinery and vehicles.
• Spreading Costs and Managing Cashflow – Hire purchase enables businesses to spread the cost of the asset over time through fixed instalments. This helps manage cashflow by avoiding a significant initial outlay.
• Future Value – On completion of the term, the business becomes legal owner of the asset. This provides long-term value and control over the equipment as well as providing an asset on which to secure future finance if required.

Is HP Right For Your Business?

It’s important to remember that the lender remains the owner until the final payment is made and formal transfer has taken place. Because HP is an ownership agreement, it allows you to claim capital allowances such as Full Capital Expensing, meaning you can often write off the cost of the purchase from your company profits and therefore pay less tax (ask your accountant for advice), this often offsets a large proportion of interest charges on the amount borrowed.

Hire Purchase At A Glance…

Type of Ownership	Ownership transfers to the business at the end of the agreement.
Payment Structure	Fixed monthly payments. Initial deposit and VAT paid upfront.
Benefits	– Acquire essential assets – Spread costs & manage cashflow – Gain ownership
Key Considerations	– Ownership not transferred until final payment – Requires a significant upfront payment
Ideal For	– Businesses needing equipment quickly & managing cashflow – Acquiring essential assets (vehicles)

Read More about Hire Purchase Finance | Define Hire Purchase |

2) Finance Lease

A lower initial outlay

A finance lease is also known as a capital lease. In this agreement, a leasing company or lender grants a lessee (your business) the right to use an asset for a predetermined period, the ‘term’ in return for monthly payments. The key differences between lease and hire purchase are that leasing is not an ownership agreement and with a lease the whole cost of the asset can be spread across the term, without needing a large deposit or to pay the VAT upfront.

At The End Of A Finance Lease

Throughout the lease term, your monthly payments cover the initial asset cost and interest. Upon reaching the end of the lease, you’ll have three options:

1. Return – If the asset no longer aligns with your business needs, you can return it to the finance provider, freeing up cashflow for other priorities.
2. Continue Leasing – You may choose to continue leasing the asset for an agreed fee, keeping the item within your business.
3. Sale – Alternatively, you can sell the asset to an independent third party from which you would receive the sale price potentially generating revenue and freeing up resources for your business.

It is possible to retain ‘title’ and ownership of the asset if you were to sell the asset to a third party who then sells it back to your business. A broker such as Portman may be able to facilitate this for you for an administrative fee.

Benefits of Finance Leases

Low initial outlay – Spread the entire cost over the term including VAT, plus there’s often an expectation of lower deposit.

Resale value – At the lease end, you may have the opportunity to sell the asset and generate income.

Tax Advantages ( Consult Your Accountant ) – In some instances finance leases may offer tax benefits whereby the whole or a proportion of the lease payment can be deducted from your operating profits.

Is a Finance Lease Right for Your Business?

Finance leases can be beneficial for businesses seeking to avoid large upfront payments for new assets. They also suit businesses who want to keep their options open at the end of the agreement.

Finance Lease At A Glance…

Type of Ownership	Lease agreement; routes to ownership are optional
Payment Structure	Fixed monthly payments covering the VAT asset cost and interest.
Benefits	– Lower initial outlay – Flexible: continue leasing, sell, return or explore ownership at the end of the term – May offer tax benefits (consult your accountant)
Key Considerations	– Longer-term commitment than an operating lease – Ownership of the asset is not part of the agreement
Ideal For	– Situations where you may wish to return the item – A lower initial outlay is needed

See Portman Finance Lease Options | View Glossary Term | Read more on Lease Financing

3) Operating Lease

Optimal asset utilisation for short-term value

An operating lease means your business (the lessee) can use the asset but not own it, avoiding any costs associated with purchase but the lessee will need to pay for any maintenance. Leases of more than 12m need to be added to the balance sheet, but leases shorter than 12m can be listed as expenses making Operating Leases well-suited to short-term needs with no desire to own the asset at the end of the term.

Matching Lease Term to Asset Use

Operating leases typically have shorter lease periods compared to the asset’s overall lifespan. This allows the leasing company to reclaim the asset and resell it or lease it again at the end of the term. This estimated resale value, is factored into the lease agreement and influences the monthly payment amounts.

Benefits of Operating Leases

Lower Level of Commitment – Businesses benefit from using assets without the burden of ownership and potential resale risks.

Shorter Lease Term for Short-Term Needs – The shorter lease term aligns with the asset’s intended short-term purpose, providing flexibility and avoiding long-term commitments.

Transparent Lease Costs – Since ownership doesn’t transfer, the lessee (your business) is typically only responsible for the asset’s maintenance during the lease term, with monthly payments reflecting the estimated depreciation in value plus interest.

While operating leases offer flexibility, it is important to remember that you won’t own the asset at the end of the lease.

Is an Operating Lease Suitable for Your Business?

Ultimately, the best way to determine if an operating lease is right for your business depends on your specific needs and financial situation. Consider factors like the expected lifespan of the asset, your budget, and your long-term plans for the equipment.

Businesses that may Benefit from Operating Leases:

Construction Companies – A business may need specialised equipment for project with a defined finish date and not require the item afterwards, making an operating lease a good option.

Logistics Business – Winning a new contract that needs a temporary increase in vehicle capacity might suit an operating lease.

Technology Start-ups – Rapidly changing technology can make operating leases attractive for accessing the latest hardware and software that might need upgrading in a shorter time period.

Event Companies – Temporary equipment needs, such as sound systems, staging or furniture for events, concerts or motion picture production.

Operating Lease At A Glance…

Type of Ownership	Ownership does not transfer to the business.
Payment Structure	Fixed monthly payments based on asset depreciation.
Benefits	– Leverage residual value – Shorter lease aligns with short-term needs – Transparent lease costs
Key Considerations	– No ownership of the asset – Upgrade options might be limited
Ideal For	– Short-term needs – Rapidly evolving technology – Preserving cashflow

See Portman Operating Lease Finance | View Glossary Term | Read more on Operating Leasing

4) Asset / Equipment Refinance

Unlock your hidden working capital

Does your company possess valuable assets and need cashflow? Asset refinancing is a strategic approach to unlock the value within your existing assets and address working capital constraints.

Asset refinancing allows businesses to capitalise on the equity held in their existing assets, borrowing funds secured against high value items. In essence, you obtain a loan using a specific asset as collateral. The lender provides a lump sum based on a pre-determined percentage of the asset’s value. You then repay the loan with interest over a set period, effectively “repurchasing” the asset.

Benefits of Asset Refinancing

Unlock Hidden Value – Asset refinancing liberates cash tied up in assets. This newly available working capital can be strategically deployed to fuel growth initiatives, manage operational expenses, or pursue other business objectives.

Collateralized Loan, Not Additional Debt – Unlike traditional loans, asset refinancing leverages your existing assets as security for the loan. This can be advantageous as it may not be considered additional debt on your company’s balance sheet, potentially improving your creditworthiness for future borrowing needs.

Predictable Repayment Structure – Asset refinancing typically offers structured repayment plans with fixed monthly instalments. This makes budgeting easy and ensures predictable cashflow.

Key Consideration for Refinance

While asset refinancing offers attractive benefits, it’s crucial to acknowledge that you are essentially borrowing against your assets. Failure to fulfil the repayment obligations could result in the lender repossessing the secured asset.

Is Asset / Equipment Refinancing Best for Your Business?

Asset refinancing can be a valuable tool for businesses seeking to unlock working capital and invest in strategic growth initiatives. But carefully consider factors such as the value of the asset being used as collateral, does the value meet your needs, your company’s ability to manage the loan repayment, and alternative financing options before making a decision.

Asset / Equipment Refinance At A Glance…

Type of Ownership	Retain use of the asset used as collateral but lose ownership
Payment Structure	Structured repayments on a loan.
Benefits	– Access hidden value in assets – Utilize assets as collateral – Structured repayments
Key Considerations	– Risk of asset repossession for loan default – Interest rates may vary based on the type of asset
Ideal For	– Businesses with valuable assets & limited working capital – Funding growth initiatives

See Portman Refinance Options | View Glossary Term | Learn about Asset Refinance

5) Contract Hire

Streamlined management for vehicle fleets

Contract hire offers a streamlined solution for businesses managing vehicle fleets. This financing option allows you to lease vehicles for a predetermined period with fixed monthly payments, simplifying budgeting and fleet administration.

Benefits of Contract Hire Finance

Predictable Monthly Payments – Unlike traditional vehicle purchases, contract hire eliminates the concern of depreciation and offers fixed monthly payments throughout the lease term. This predictability facilitates budgeting and simplifies fleet cost management.

Simplified Expense Management – Many contract hire agreements often include routine maintenance within the monthly payment. This eliminates the need for separate budgeting for maintenance costs, streamlining expense management for your fleet.

Improved Cashflow – Contract hire avoids the large upfront costs associated with purchasing vehicles. This can be a significant benefit for businesses seeking to preserve working capital for other operational needs.

Considerations for Contract Hire

While contract hire offers several advantages, it’s important to remember that you won’t own the vehicles at the end of the lease term. Additionally, mileage restrictions may apply in some contract hire agreements.

Does Contract Hire Finance Work for Your Business?

Contract hire can be a valuable asset finance solution for businesses with company vehicles, particularly those managing fleets. It simplifies fleet management, improves cashflow, and offers predictable budgeting. However, it’s important to consider your long-term needs and weigh the benefits against potential limitations, such as mileage restrictions and lack of ownership at the end of the lease.

Some examples of businesses that may benefit from Contract Hire:

Delivery Companies – Regularly updated vehicles can ensure reliability and potentially lower maintenance costs.

Taxi & Ride-Sharing Companies – Newer vehicles offer a better customer experience and may comply with updated regulations.

Rental Car Companies – Contract hire allows for offering a wider range of newer models to customers.

Sales Teams – If salespeople have consistent travel needs, contract hire offers predictable costs.

Field Service Companies – Predictable mileage is common for technicians visiting customer locations.

Startups – Preserving cashflow is crucial for young companies, and contract hire allows access to essential vehicles.

Small Businesses – Limited budgets can be better allocated to core operations with contract hire’s predictable costs.

Overall, contract hire is a good option for businesses that…

• Need to manage a fleet of vehicles.
• Prioritize predictable budgeting and streamlined fleet administration.
• Seek to improve cashflow by avoiding large upfront costs.
• Have consistent mileage needs for their fleet vehicles.

It’s important to remember that each business has unique needs. Carefully consider your specific requirements and weigh the benefits of contract hire against other financing options before making a decision.

Contract Hire (Fleet Lease) At A Glance…

Type of Ownership	Ownership does not transfer to the business.
Payment Structure	Fixed monthly payments often including maintenance costs.
Benefits	– Predictable costs for fleet management – Simplified expense management – Improved cashflow
Key Considerations	– No ownership of the vehicles – Mileage restrictions might apply
Ideal For	– Businesses with company vehicle fleets – Predictable budgeting & streamlined fleet admin

See Portman Contract Hire | View Glossary Term | Read more on Contract Hire

6) Business Contract Purchase / HP with Balloon

Balancing ownership and short-term needs

Business contract purchase with a balloon payment offers a financing option that combines aspects of ownership and short-term use. This approach can be suitable for businesses acquiring assets they need for a limited time but may eventually want to own.

In this agreement, a business essentially “rents to own” an asset from a lender. An initial deposit is followed by fixed monthly payments over a predetermined term. However, unlike a traditional lease, a significant final payment, known as the balloon payment, is due at the end of the term. If this final payment is made, the business becomes the legal owner of the asset.

Considerations for Short-term needs

While this option offers a path to ownership, it’s important to remember that the business doesn’t own the asset until the final payment is made. Additionally, interest is typically charged on the outstanding balance throughout the agreement. This can make the total cost of ownership higher compared to a traditional purchase. Here’s where the “short-term needs” aspect comes in:

Planned Obsolescence – This financing approach can be beneficial for acquiring assets with a shorter lifespan or those prone to rapid technological advancements. Since ownership isn’t guaranteed until the end of the term, the business avoids the risk of owning outdated equipment.

Project-Specific Equipment – For projects with specific equipment needs, contract purchase with a balloon payment allows businesses to acquire the necessary assets without a long-term financial commitment. They can then choose to own the equipment if it continues to be valuable after the project is complete.

Benefits of Contract Purchase with a Balloon Payment

Potential Ownership – This option provides a path to ownership for businesses that may want to own the asset in the long-run.

Lower Monthly Payments – Because you will be paying a balloon, the fixed monthly payments only cover part of the value of the asset, which can make monthly repayments cheaper, though the total purchase price including the balloon could be higher than buying outright.

Flexibility for Short-Term Needs – This approach is well-suited for acquiring assets needed for a limited time or those that are likely to become obsolete, unfashionable, or go out-of-date.

Important Considerations

Total Cost of Ownership – Charges throughout the agreement can increase the overall cost compared to a traditional purchase.

Ownership Not Guaranteed – The business doesn’t own the asset until the final balloon payment is made.

Examples of Businesses that might use Contract Purchase with Balloon

Businesses that might benefit from Contract Purchase are those that want to leave the ownership door open when the term is up, based on whether they still need the asset. This is useful for anyone who is investing to fulfil a contractor provide a service that may or may not continue after the length of the initial term. Consider factors like the expected lifespan of the asset, your budget for equipment ownership, and potential alternative financing options before making a decision.

Construction Companies – They might use this option for specialised equipment needed for a specific project, like a piling rig or large excavator. If the businesses wins more contracts they can pay the balloon and own the equipment, if it doesn’t work out they can let the unit go.

Scientific and Research Businesses – When developing a new product, a contract purchase with a balloon payment could be suitable for acquiring specific testing equipment. This allows access to the equipment which can be used for the duration of the original test, kept if more development is needed or released to the lender if not..

Important considerations for Contract Purchase with Balloon

These are just a few examples, and the suitability of contract purchase with a balloon payment depends on your specific circumstances. Consider factors like:

• Budget – Can your business comfortably afford the monthly payments and potential balloon payment?
• Long-Term Need – Will you likely need the equipment beyond the initial project or short-term use?
• Residual Value – Does the equipment have a resale market if you decide not to own it after the lease term?

By carefully considering these factors, businesses can determine if contract purchase with a balloon payment offers the best financing solution for their specific needs.

Contract Purchase with Balloon Payment At A Glance…

Type of Ownership	Ownership transfers to the business upon making a final balloon payment.
Payment Structure	Fixed monthly payments with a large final balloon payment.
Benefits	– Leaves the door open to ownership or release of the asset – Spreading costs – Flexibility for short-term needs
Key Considerations	– Total cost of ownership can be higher – Ownership not guaranteed until balloon payment
Ideal For	– Planned obsolescence equipment – Project-specific equipment needs

See Portman’s Hire Purchase Solutions | Contact Portman for more information

Don’t forget to read our article on “Asset Finance and Made Simple” from our Chief Executive Officer (CEO) – Alex Read, for more asset finance know-how.

Alternatively, contact Portman for a dedicated advisor to walk you through your options and tailor a business financing solution that works for you.

It goes without saying that like many forms of business finance, there may be associated fees and interest payments. When approached strategically, asset finance could provide valuable opportunities for growth and success of your business.

Don’t navigate asset financing alone & make informed financial decisions.
Contact Portman today.