Asset finance loans: What they are, what they’re for and when to use them

Asset finance loans give UK businesses a cost-effective way to invest in vehicles, machinery and equipment without large upfront costs. Learn how they work, how they work and how they compare to flexible alternatives.

April 3, 2025
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There is a huge range of financial products available and  tailored to various business uses. Think loans, overdrafts, credit cards and revolving credit facilities – to name a few. While most can be used for any business purpose, asset finance is specifically designed for investing in physical equipment and products to keep your business running.

In practice, asset finance loans are used to fund the purchase of assets, like equipment and machinery. 

Asset finance has some notable benefits, but there are a few drawbacks too. In this article, we’ll look at this type of loan in detail and outline all the pros and cons, as well as consider some alternative options you may not have heard about. 

What are asset finance loans and how do they work?

Asset finance loans let you buy essential equipment, vehicles, or machinery for your business, without having to raise the capital upfront or compromise your cashflow. Instead, you borrow a sum to purchase your agreed assets, then repay your lender in fixed amounts over time. The asset(s) being purchased are security for the loan, making it a lower-risk option for lenders and often resulting in a lower interest rate. 

This is different to traditional small business loans, where funding is usually unsecured or tied to personal guarantees. Asset finance loans are directly linked to the item being financed, meaning you can access funding without risking unrelated assets or having to meet strict collateral requirements.

Different types of asset finance: hire purchase, leasing, and refinancing

Asset finance comes in a few different guises. It’s well worth getting to grips with their differences to make sure you choose the best option for your business. Here’s a rundown on all the types of asset finance lenders can offer:

  1. Hire purchase – This arrangement lets you spread the cost of an asset by paying in instalments after taking possession of it. Once the final payment is made, the official ownership is transferred to you. It is ideal for companies that want to own the equipment outright but need time to pay for it.
  2. Leasing – Here, instead of buying the asset, you rent it for a fixed period. The leasing agreement often includes maintenance and servicing, making it a flexible and cost-effective solution. At the end of the lease, you can return the asset, extend the lease, or sometimes buy the equipment at a reduced cost.
  3. Asset refinancing – If your business already owns valuable equipment or vehicles, it can use them as security to release capital. This is useful for companies that need a cash injection but do not want to take out a traditional loan or dilute ownership with equity investment.

How asset finance loans compare to traditional business loans

Asset finance loans differ from standard business loans in several key ways:

  • Interest rates and repayment structures – Because asset finance is secured against the purchased equipment, interest rates tend to be lower than unsecured loans. Repayments are often fixed, making budgeting easier.
  • Flexibility – Asset finance lets you access the equipment you need without large upfront costs, helping you manage cash flow more effectively.
  • Security – Unlike traditional loans that may require personal guarantees, asset finance uses the asset itself as security, reducing personal financial risk.

You may prefer asset finance over a traditional loan when acquiring expensive assets, preserving working capital, or avoiding the risks of using property as collateral.

Who qualifies for asset finance and what are the requirements?

While asset finance is often more accessible than unsecured loans, you still need to meet certain criteria:

  • Trading history and turnover – Many lenders require a minimum trading history, usually at least six months to a year. Turnover requirements vary, but a company must demonstrate it can afford repayments.
  • Asset value – The asset being financed must hold sufficient value to serve as security. Lenders may be more cautious about financing items that depreciate quickly.
  • Credit history – Having a good credit record will improve your company’s chances of approval, but asset finance is sometimes available to businesses with lower credit scores, as the asset itself reduces the lender’s risk.

Do I need a good credit score to qualify for an asset finance loan?

A good credit score can certainly improve your chances of securing financing, but it is not always a strict requirement when it comes to asset finance loans. That’s because this is a secured form of lending where the asset acts as collateral (i.e. if you don’t keep up with your repayments, the lender can repossess the asset in question). 

Lenders primarily assess the value of the asset being financed and your ability to cover repayments. 

This makes asset finance more accessible than most unsecured business loans,  which rely heavily on the borrower's creditworthiness.

Additionally, if your business has a limited credit history or needs to improve your credit score, you may still qualify for asset finance (provided you demonstrate stable cash flow and a clear repayment plan).

What is the main advantage of asset finance loans over bank loans?

The biggest advantage of asset finance over loans over bank loans is that, since the loan is secured against the asset itself, lenders face lower risk. This often results in more favourable interest rates compared to unsecured bank loans.

How can asset finance firms offer lower interest rates than bank loans?

One of the key advantages of asset finance is its affordability. But how can asset finance firms offer lower interest rates than bank loans?

  • Asset-backed security – Because the equipment itself serves as collateral, lenders face less risk. If a business defaults, the lender can repossess the asset, reducing potential losses.
  • Less stringent lending criteria – Banks often have stricter credit score requirements and may demand personal guarantees. Asset finance firms focus more on the value of the asset and your ability to make repayments.
  • Lower costs – By securing better rates and offering structured repayments, asset finance makes it easier for you to invest in equipment without heavy financial strain.

Understanding the impact of asset depreciation on finance agreements

Depreciation plays a crucial role in asset finance, affecting the total cost of borrowing and repayment terms.

  • How depreciation affects repayments – Assets that lose value quickly, such as vehicles, may have higher repayment rates or require a larger deposit to offset the lender’s risk.
  • Financing fast-depreciating assets – If an asset depreciates significantly, leasing may be a better option than hire purchase, as it avoids ownership costs associated with a declining-value asset.
  • Mitigating depreciation risks – Choosing assets with strong resale value, opting for flexible finance terms, and considering maintenance-inclusive leases can help you manage depreciation more effectively.

Can asset finance be used for second-hand equipment?

Many lenders will finance second-hand equipment, especially if it holds its value well and remains in good working condition. This can be a highly cost-effective way to acquire essential machinery or vehicles without the premium price of brand-new assets.

Many industries, such as construction, manufacturing, and transportation, rely on second-hand equipment that still delivers excellent performance at a fraction of the cost.

The only potential catch is that lenders will want to eyeball the equipment in question. They’ll look at things like the equipment’s age, condition, and resale value before approving financing.

If the equipment has a strong market demand and a long lifespan, it can often be financed under similar terms as new assets. Additionally, by choosing second-hand equipment, you can secure a higher-specification model for the same budget.

Second-hand equipment also qualifies for capital allowances in the UK. You can claim back the costs of investing in plant and machinery costs, up to an investment limit of £1m. 

How asset finance supports sustainable business growth

Asset finance helps you invest in the equipment you need without straining cash reserves.

  • Investing without large upfront costs: You can acquire machinery or vehicles essential for growth without depleting working capital.
  • Scaling operations: By spreading the cost of equipment, you can expand production or services while maintaining financial stability.
  • Supporting cash flow and stability: Leasing and refinancing provide long-term financial flexibility, ensuring you have the assets needed while keeping funds available for other expenses.

Alternative to asset finance

Asset finance loans are a practical way to invest in machinery and equipment. As we’ve mentioned, they often come with lower interest rates since they’re secured. However, they’re somewhat limited in their scope.

An asset finance loan is tied to a particular asset. While this could work well if you’ve got a clear idea of what you need to invest in, it limits your capacity to adapt your strategy, reprioritise your spending or use a loan on something different.

An iwoca Flexi-Loan, in comparison, is not limited by an attachment to a particular piece of equipment. You’ll have a credit limit – much like a credit card – that you can draw down on for whatever you may need: New equipment, yes, but also to cover salaries or a big marketing push. 

Apply for a Flexi-Loan with our simple online form. With fast approval, minimal paperwork and no hidden fees. Apply for a Flexi-Loan today

Francois Badenhorst

Francois is a writer and editor with over a decade of expertise covering fintech, financial services, and technology. His work focuses on start-ups and SMEs, providing insights and strategies to help

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