Asset finance, and the equipment already sitting in the business you are buying

What asset finance is

Asset finance is funding tied to one identifiable thing. A vehicle, a machine, a piece of plant, a set of equipment with a serial number on it. The funder can point at the asset, value it and take it back, and that is why the money is often available when a general business loan is not.

It comes in three shapes, and the difference between them is who owns the asset and what happens at the end.

• Hire purchase. The business pays instalments and owns the asset outright at the end, usually on payment of a small option fee. Used where the equipment will be kept for its working life.
• Finance lease. The funder owns the asset and the business uses it for an agreed period in return for rentals. At the end the asset is sold, extended or returned, depending on the agreement.
• Operating lease or contract hire. The business is buying use rather than ownership, and hands the asset back at the end against a condition and mileage standard. Common on vehicles.

There is a fourth use that gets overlooked. Equipment the business already owns outright can be refinanced, releasing cash against it without selling it. That is capital release, and in an acquisition it is often the cheapest money in the deal.

What the funder is looking at

The asset is the security, so the questions are about the asset. Is it identifiable, with a serial number or a registration. Is there a resale market for it, and how deep. How long is its working life, and does the proposed term sit comfortably inside that. Is it fixed into a building or embedded in a process in a way that makes it impossible to recover.

That last point decides more applications than buyers expect. A tracked machine or a fleet of vans is easy. A fit-out, a bespoke installation or software is hard, because there is nothing to take back and nobody to sell it to. Funders describe these as soft assets, and where they are funded at all, they are funded on the strength of the business rather than the equipment.

Alongside that, the funder looks at the trading business in the ordinary way: accounts, payment conduct, and on smaller agreements a personal guarantee from the directors.

How it is priced and structured

The pattern is consistent even though the numbers are not. There is normally an initial payment or deposit, then fixed instalments across a term matched to the working life of the asset, then a defined position at the end: ownership on hire purchase, a return or a sale on a lease.

A documentation fee is usual at the start, and an option-to-purchase fee at the end of a hire purchase agreement. VAT is handled differently between the products, which changes what is payable at the outset rather than what the asset costs overall, and it is worth checking which treatment applies before the cash flow is planned. Where a balloon payment sits at the end of an agreement, it is a real obligation and it needs a plan behind it.

Where it fits in an acquisition

The clearest use is at completion. Where the target owns equipment outright, refinancing it releases cash on the day the deal completes, and that cash reduces what senior term debt has to cover. A buyer who has not looked at the asset register has usually left money in the business that could have funded part of the purchase.

The second use is straightforward: buying the kit the business is going to need anyway without putting it on the acquisition facility. Replacing tired vans in an HVAC business, or the treatment equipment in a pest control round, sits naturally here rather than on a term loan.

Where the balance sheet has stock and a debtor book as well as plant, a single facility built across all of them may be better than several separate ones, which is asset-based lending.

What goes wrong

The assets were already financed. Vans on hire purchase and machines on lease appear on the yard and in the buyer's mental valuation, and belong to somebody else. Settlement figures and existing charges have to be found before the price is agreed, not after.

Agreements do not survive the change of control. Some require the funder's consent, some accelerate on a change of ownership, and some cannot transfer at all on an asset purchase and have to be settled and rewritten. Each of those is a cost that lands at completion.

The term outlasts the asset. Paying for a machine after it has stopped earning is a slow, avoidable problem, and it is created at signing.

The balloon was not planned. A large final payment agreed years earlier arrives regardless of what the business is doing that quarter.

Condition charges at the end of a hire. On returned vehicles and equipment these are real, and they are assessed by the funder rather than by the business handing them back.

What a funder will want to see

• An asset schedule with descriptions, serial numbers or registrations, ages and current condition.
• Proof of ownership, and settlement figures for anything already under finance.
• Recent accounts and management figures for the business that will make the payments.
• On refinance of owned assets, an inspection or valuation, which the funder will arrange itself.
• The deal paperwork where the funding is part of an acquisition.

The general order a funder asks for a file is in the document checklist, and the product terms are set out in the glossary.

Getting the asset register in front of the right funders

Asset funders specialise narrowly, by asset type and often by age of asset. The one that is comfortable with a fleet of recent vehicles is frequently not the one that will look at older plant, and sending the schedule to the wrong one produces a small answer rather than a useful one.

We know specific people who fund the kind of equipment that sits in the businesses we cover, so the asset register goes to funders who recognise it instead of to whoever answers first. Tell us what the business owns and we come back to you with who will lend against it.