Business Loans vs Asset Finance: Which Is Better for Equipment Buying?

Whether you are expanding your business or developing a new product to launch, purchasing equipment is a big decision. Despite having earmarked cash, you would not feel inclined to dip into it to purchase equipment, as it is a big expenditure and may disrupt your cash reservoir. Well, you do not have to worry about it. Various funding sources are out there to help you purchase equipment. Among all those, the most popular ones are business loans and asset finance.

What are business loans?

A business loan is a loan available from direct lenders or banks that you can utilise to purchase equipment. These loans are term loans, meaning they are paid back in fixed instalments over a period of time.

Depending on the value of the equipment, your lender will decide whether the loan will be unsecured or secured. If the loan amount is large, lenders might demand collateral, which could be repossessed in case of default.

As you use these loans to purchase equipment, they can be called equipment financing. Bear in mind that whether it is secured or unsecured, you will have to pay some money up front. It means you should pay down at least 10% of the value of the equipment. The larger the down payment, the lower the loan-to-value and interest rates.

Here are the advantages and drawbacks of business loans in the UK:

Upsides	Downsides
You have full control of the equipment.	Sometimes, the upfront payment could be higher.
It is more affordable than leases if you have to use the equipment for a long term.	Monthly repayments can be higher than a lease contract, especially if your credit score is bad.
Depreciation is deducted, so you will gain tax benefits.	If you have secured it against an asset, you are at risk of losing it in case of default.
You are completely free to modify assets. You can sell it anytime, provided you settle the whole debt first.	It may also require a personal guarantee, which enables a lender to access your personal assets to get their money back in case of default.

What is asset finance?

Asset finance is a way to purchase equipment by borrowing against an asset. Equipment itself will be collateral. Upon failure of repayment, your equipment will be repossessed. However, you might have to secure it against another valuable asset. While equipment is considered collateral, it does not reduce much risk for a lender, and this is because it is a depreciating asset. It is likely that the resale value of your equipment is lower than the total amount of debt you owe.

At the time of asset financing, you will have to pay some money up front. The following are the types of asset financing:

Types	Features
Hire purchase	You will own the asset at the end of the contract.Interest rates might be slightly higher than those for business loans.Competitive interest rates if the down payment is more than 10%.You cannot modify or sell the equipment until the end of the contract.
Finance lease	This is like renting the equipment. The ownership will be retained by the equipment provider. No deposit is required, and monthly instalments will be lower as you are paying towards depreciation. Monthly payments are tax-deductible.At the end of the contract, you will either return the equipment or purchase it. You can renew the lease, too.
Operating lease	It is ideal for short-term usage, especially when equipment quickly becomes obsolete. The ownership will remain with the lessor, with no option of buying it at the end of the contract.Unlike a finance lease, maintenance charges are borne by the lessor.Monthly instalments are tax-deductible, and the equipment is returned to the lessor at the end.

Difference between asset finance and business loans

Here is the difference between asset financing and business loans:

Factors	Asset finance	Business loans
Security	Asset finance is secured against your business asset. It may also require a personal guarantee.	Business loans are not subject to collateral, but they are approved based on your creditworthiness.
Risk	Your lender has the right to repossess and liquidate the secured asset in order to cover their money back.	You do not have to bear the risk of losing any assets, but high interest rates are charged. You are at risk of losing assets if you have given a personal guarantee, which is normally the case with large loans.
Flexibility	Depending on the type of asset financing, you may not have much flexibility. It is vital to adhere to the contract terms to avoid penalties.	With business loans, you can use the equipment the way you want. There are no terms and conditions related to the usage.
Purpose	Asset finance is generally ideal for the purchase of equipment or new plant and machinery.	Business loans are generally suitable for working capital and expansion.

Asset finance or unsecured business loans – which is cheaper?

Asset finance offers lower interest rates than business loans, as they are subject to collateral. They reduce the risk of a lender, but the devil is in the details.

Asset finance usually comes with a longer repayment period. This results in a higher total amount despite lower interest rates. However, business loans are paid back quite soon.

At the time of deciding between the both funding options, you should compare the total cost.

Consider other factors as well. For instance, if you do not intend to purchase equipment, you should consider asset finance rather than business loans. Consider fees and associated charges in order to calculate the total cost of funding. Keep your credit score in good condition in order to avail yourself of lower interest rates.

The bottom line

Asset finance and business loans can be used to purchase equipment, but you should carefully assess your repayment capacity, the terms and conditions of the contract, your purpose, and your credit score. Consult asset finance brokers in the UK if you do not know which type of asset financing is suitable for you. They can even help you know whether asset financing or business is a better choice for you.