Businesses needing capital to purchase assets face a choice between asset finance and traditional business loans. Both provide funds, but they differ fundamentally in how they work, what costs are involved, and which circumstances make each most appropriate. Understanding these differences helps you select the financing approach delivering optimal value for your business.
Asset finance is secured lending where the asset itself provides security. The asset backs the loan, reducing lender risk and enabling better rates for borrowers. You cannot default without risking asset repossession.
Traditional business loans are unsecured (or secured against general business assets). Lenders rely more heavily on your credit history, business performance, and general creditworthiness. Unsecured lending typically carries higher interest rates due to increased lender risk.
Asset finance offers several compelling benefits compared to traditional business loans:
Traditional business loans work better in certain circumstances:
Interest rates typically favour asset finance for borrowers with moderate credit profiles. Established businesses with excellent credit access can access unsecured business loan rates starting from 3-6%, competing with asset finance rates. Newer or smaller businesses face unsecured business loan rates of 10-20%+, whilst asset finance for the same businesses costs 6-12%.
Asset finance advantages are most pronounced for borrowers with weaker credit histories or limited business trading records.
Asset finance typically improves cash flow compared to large capital purchases. Monthly payments are often lower than the alternative loan payment because the finance company retains ownership and residual asset value.
Budgeting becomes easier with predictable monthly payments and potentially included maintenance. Businesses using working capital for operations find the capital preservation particularly valuable.
Not directly, but you could borrow using asset finance to purchase an asset, then sell that asset and use the proceeds to pay down existing debt. This involves additional steps and potential complications, so discuss options with your lender.
Asset finance works best for medium to long-term needs. For short-term requirements, traditional loans or operating leases might prove more cost-effective. Calculate total costs for your specific timeframe.
Business loans offer greater flexibility in use (you can spend funds on any business purpose). Asset finance is specifically tied to the asset purchase. For flexibility, business loans win. For acquiring specific assets, asset finance typically offers better terms.
Funding Search enables comparison of both asset finance and business loan options. View rates, terms, and total costs for both financing types from multiple providers. This comprehensive view helps you identify whether asset finance or traditional business loans deliver better value for your specific business needs.