Asset finance

Also called Hire purchase, Equipment leasing, Finance lease

Paying for equipment over its useful life rather than out of this month's cash.

What it means

Asset finance funds equipment, vehicles and machinery. Under hire purchase you pay instalments and own the asset at the end. Under a lease you pay to use it, with different options at the end depending on the type of lease.

The asset itself is usually the primary security.

Why it matters

It matches the cost of a long-lived asset to the period it earns money, which is usually better for cash flow than paying up front.

The tax treatment differs between hire purchase and operating leases — capital allowances may be available on one and not the other — and that difference is worth real money.

What it looks like in practice

Compare on total cost over the term, not the monthly payment. Check for documentation fees, option-to-purchase fees and early settlement terms.

Consider whether you want to own the asset at the end. For fast-depreciating technology, often not; for machinery with a long life, usually yes.

What to watch out for

Personal guarantees, which are common on smaller facilities.

Balloon payments at the end that were not prominent at the start.

Financing an asset over a term longer than it will usefully last, which leaves you paying for something you have already replaced.

Where to get proper advice

Your accountant on the tax treatment before you choose the structure, and a broker to compare the market. The dealer's finance is convenient and is rarely the cheapest.