Asset finance vs leasing: What’s the difference?

Explaining the difference between asset finance and leasing

Growing a business requires a huge investment of time, money and effort.

But a lot of companies with the potential for great success fail to reach it because they can’t afford the assets they need to take on more work.

What these businesses don’t realise, however, is that they can actually acquire high-value equipment without waiting years to build capital reserves by financing those assets.

Financing lets you spread the cost of vehicles, machinery and other equipment over time. That way, you can get the assets you need immediately and cover the costs through small, affordable monthly repayments.

But different types of finance agreements have different outcomes. Some, like asset finance, often end in ownership. Others, like leasing, function more like rental agreements.

Understanding the difference between asset finance and leasing – two of the most common commercial finance solutions – is essential for making the right decision for your business.

Join us as we explore how each finance option works and when they’re most appropriate so you can grow your business efficiently.

What is asset finance?

Asset finance explained

Asset finance is a safe, convenient and affordable funding option to get new assets for your business or replacing aging equipment.

Rather than make a costly purchase outright, asset finance splits the cost into smaller monthly payments, often with fixed interest rates and cost structures.

That way, you can grow your business while retaining the working capital you need to fund daily operations, react quickly in emergencies and drive other growth initiatives. And you can avoid the hidden costs of delaying equipment upgrades.

Common types of asset finance include:

• Hire purchase: A lender buys the asset on your behalf and you pay for it in monthly installments. Once all payments have been made, you gain ownership of the asset

• Contract hire: This is a long-term rental agreement where you pay to use an asset (typically a vehicle) for a fixed period. Ownership remains with the lender and they get the asset back at the end of your contract

• Business contract purchase: You make lower monthly payments to use the asset, but have an option to make a large final payment. So at the end of your term, you can either return the asset or make the balloon payment to own it

• Asset refinance: This is a way to release capital tied up in an asset you already own. You offer a high-value asset as collateral for a loan, letting you improve cash flow while continuing to use that asset

How does asset finance work?

Once you decide what assets to finance, you reach out to an asset finance lender.

You could go to a generic high-street lender. But these are generally unqualified to finance specialist equipment. So you might face higher interest rates and stricter approval conditions as they try to protect themselves against a risk they don’t quite understand.

That’s why businesses typically use an independent asset finance broker like Kane Financial Services.

We’ve spent more than 35 years developing strong relationships with industry-specific asset finance lenders across Northern Ireland and mainland UK. That means we can connect you with exclusive contracts with better rates and terms that generic high-street lenders can’t match.

Specialist lenders can also offer flexible asset finance contracts based around seasonal business needs. So you can grow your business while maintaining your financial stability.

After you connect with a lender through your broker, you submit an application with the details of your company, the assets you want to finance and expected costs, along with the documents you need to apply for financing.

The lender then reviews your application and decides whether or not to offer you an asset finance agreement.

This agreement explains:

• Your deposit (usually 10-20%)
• Your repayment amount
• Contract length (usually 12-60 months)
• Interest rate
• Fees
• Your responsibilities for asset care
• The end-of-term outcome

Once you sign, the lender either buys the assets you requested or gives you the money you need, depending on your type of agreement.

What is asset finance used for?

Asset financing is a great way to access high-value assets without spending years saving up to buy them outright. This makes it a particularly popular choice for small businesses.

Since it usually ends in ownership, businesses typically use asset finance for equipment with long working lifespans that they’ll need to use consistently.

So asset finance is often used for things like:

• Commercial vehicles: Panel vans, HGVs, refrigerated trucks
• Construction equipment: Excavators, bulldozers, dumpers
• Agricultural machinery: Tractors, combine harvesters, balers
• Manufacturing machinery: CNC machines, injection moulding machines, conveyor systems
• Industrial equipment: Air compressors, generators, industrial boilers
• Engineering equipment: Lathes, milling machines, laser cutting machines
• Aircraft: Helicopters, private jets, fixed-wing aircraft
• Marine vessels: Fishing boats, workboats, commercial barges

Pros and cons of asset finance

The advantages of asset finance include:

• You can gain ownership of valuable assets quickly
• You avoid large upfront payments that harm cash flow
• You can get much higher quality equipment compared to purchasing
• You can start using the assets to grow your business immediately
• Ownership-based agreements offer big tax advantages
• You can get many different assets under one agreement
• Flexible repayment terms match your cash flow cycles

But the drawbacks of asset finance consist of:

• Interest rates means the overall cost of assets is higher
• You’re committed to monthly repayments for the full term
• If the asset depreciates quicker than expected, you take the hit
• Early settlement can carry an additional charge

Asset finance tax considerations

The types of asset finance listed above are generally treated as purchases for tax purposes.

That means you might be able to claim capital allowances, including Annual Investment Allowance (AIA).

These tax benefits of asset finance let you offset your expenses against taxable profits, helping you retain as much money as possible. 

The money you save also helps cover the cost of interest, bringing down the relative amount you pay for the assets in total.

What is leasing?

Leasing explained

Even experienced borrower businesses often talk about asset finance and leasing as two completely different commercial funding options.

But in reality, leasing is a type of asset finance!

The difference is that a lease is more like a rental agreement. So you use the asset for an agreed period without taking on the responsibility of ownership.

Leasing is ideal for businesses that prioritise flexibility, need to reduce monthly expenses or upgrade their equipment regularly.

Common types of leasing include:

• Finance lease: A long-term leasing agreement that lets you use an asset for most of its useful lifespan. But since you never become the legal owner, you don’t need to deal with disposal or depreciation

• Operating lease: A short-term leasing agreement that gives you access to assets with no long-term commitment. So each time your contract ends, you can take out a new agreement that replaces the leased asset with a newer model

How does leasing work?

Since leasing is a type of asset finance, it works much like other asset financing options.

You choose the equipment you need and find a specialist lender through an asset finance broker. Then you submit an application for the lender to review and approve.

The lender buys the asset and lets you use it in exchange for regular monthly payments. But they retain ownership of the asset from start to finish.

At the end of your lease, you have the option to return it, replace it or just keep renting it.

What is leasing used for?

Leasing is a smart commercial funding option for assets that quickly become outdated or lose value.

That’s because a lease lets you access cutting-edge equipment at a much lower cost than buying it outright. And you never need to worry about being stuck with assets you don’t want and can’t sell on.

Leasing is a popular option for assets like:

• Company cars: Executive saloons, SUVs, electric company cars
• IT equipment: Laptops, desktop computers, servers
• Office equipment: Photocopiers, multifunction printers, telephone systems
• Catering equipment: Commercial ovens, refrigeration units, dishwashers
• Medical equipment: MRI scanners, ultrasound machines, patient monitors
• Printing equipment: Digital presses, wide-format printers, finishing machines
• Gym & fitness equipment: Treadmills, cross trainers, strength machines
• CCTV & security systems: CCTV cameras, access control systems, intruder alarms

Pros and cons of leasing

The benefits of leasing include:

• Costs are even lower than other types of asset financing agreements
• You have frequent opportunities to replace or upgrade leased equipment
• You don’t take on the consequences of asset depreciation
• You don’t need to think about disposing assets that are no longer needed
• It’s an ideal solution for short- to medium-term asset needs
• There are multiple end-of-contract options to choose from
• Lease payments are often fully deductible as expenses

But the drawbacks of leasing consist of:

• You never own the asset, which makes leasing a poor fit for certain equipment
• Your rental payments never create an owner business asset that you can sell or refinance
• There may be some restrictions on how and where you use the rented asset
• Repeatedly extending your lease can increase costs beyond purchase value

Leasing tax considerations

Leasing has slightly different tax implications depending on which type of lease you choose.

Finance lease payments are usually split between finance charges and capital repayments. The finance element might be tax deductible. But since ownership remains with the lender, you can’t claim capital allowances.

Operating lease payments are normally treated as an operational expense. So you can usually deduct your rental payments against taxable profits. Though again, you can’t claim capital allowances.

Asset finance vs leasing: Which is better?

When is asset finance better than leasing?

It’s best to take out an asset finance agreement when you want to own high-cost assets that you’ll continue to use in the future. That includes commercial vehicles, machinery and equipment.

Eventual ownership lets you build asset value for your businesses without continuing to pay for assets you regularly use. You also have greater control over modifications, use and maintenance without the restrictions that can apply to leased assets. And if the asset stops being useful, you can either sell it or rent it out yourself to generate additional revenue.

When is leasing better than asset finance?

If your business relies on technology or machinery that dates or depreciates quickly, leasing is often the better choice. That’s why it’s a very popular option for IT equipment, office technology, medical equipment and company cars.

The lower monthly costs of leasing reduce the amount of working capital you tie up in business assets. And you never need to deal with the hassle of selling or disposing of equipment you no longer need. This also makes leasing a very effective solution for getting the assets you’ll only need for a specific project or fixed period.

Find your perfect finance lender with Kane Financial Services

With 35+ years’ experience and a wide portfolio of trusted lenders, Kane Financial Services supports businesses across a wide range of industries throughout Northern Ireland and mainland UK.

Our exclusive connections give you access to competitive rates and terms that banks and high-street lenders can’t match. And we’re on hand to guide you through the whole process to reduce delays in your asset finance application.

Contact us online today or call 028 9187 4000 to get a free no-obligation quote for commercial funding.