Asset finance or a term loan. Which funds the kit?
Asset finance funds a specific machine and is secured largely on that machine, repaid over the asset’s working life and held apart from your other borrowings. A term loan funds whatever you point it at and is secured on the whole business, drawing on the general debt capacity a lender will extend against your earnings. Neither is the better product; they are different shapes of borrowing, and the choice follows the asset. When the spend is a single, long-lived, resaleable piece of plant, matching the funding to it keeps the debt self-liquidating and leaves your senior facilities free for working capital and growth. When the spend is mixed, part equipment and part installation, fit-out or the working capital the asset pulls behind it, a term loan funds the whole of it in one line. The three forms of asset finance (hire purchase, a finance lease and an operating lease) differ mainly on who ends up owning the asset and who carries the risk in its residual value. This guide sets out the mechanics, the cash-flow and cost arithmetic, the accounting and tax read to put to your accountant, and the security, at August 2026 rates.
Written for the borrower’s side of the table. This is general guidance, not advice on your specific purchase, and the tax read in particular is one to confirm with your accountant. It deepens the shorter answers in our working guide.
Three ways to finance kit, split by who ends up owning it.
Asset finance comes in three forms, and the difference between them is ownership. Under hire purchase you pay a deposit and then fixed instalments over an agreed term, commonly three to five years, and at the end you own the asset outright for a nominal option fee. The lender holds title as security until the last payment, but the asset is on your balance sheet from the start and it is yours to keep. A finance lease hands you use of the asset for most of its economic life against rentals, with the lessor keeping legal title; because you take substantially all the risks and rewards of owning it, the asset sits on your balance sheet even though you never take title.
An operating lease is the true rental. You pay for use over a period shorter than the asset’s life, hand it back at the end, and the lessor carries the residual value, the risk that the kit is worth less than expected when it comes back. It suits assets you would rather rotate than own: vehicles, IT, anything that dates quickly. A term loan sits outside all three. The bank lends you cash, you buy the asset yourself and own it from day one, and the loan is repaid to a contracted schedule that has nothing to do with the machine. What secures the loan is the business, usually through a debenture, not the asset alone.
The distinction that drives the rest of this page: asset finance is money tied to a thing, priced and secured against that thing and repaid as it earns its keep; a term loan is money tied to the business, priced against your covenant and free to fund anything. This is equipment and plant finance throughout, distinct from asset-based lending, which borrows against the receivables and inventory on your balance sheet rather than the machine on the floor, as our guide to asset-based lending sets out.
Ownership and residual value settle the shape before price does.
Whether you want to own the asset at the end decides more than the interest rate does. Hire purchase and a term-loan purchase both leave you owning the kit and carrying its residual value, the gain if it holds its worth and the loss if it does not. For long-lived plant you will run for its full life, a moulding line, a CNC machine, a piece of process equipment with a decade of use in it, ownership is what you want, and paying the asset down to a residual you keep is the right shape. A finance lease lands in much the same place in substance: you carry the risks and rewards across most of the asset’s life even though legal title never passes, which is why it sits on your balance sheet alongside a purchase.
An operating lease is the shape for the opposite case. Where an asset dates fast, or you rotate a fleet on a fixed cycle, or the secondhand value is hard to predict, handing the residual risk to the lessor is worth paying for. You never own the kit, you return it at the end, and you carry none of the exposure to what it fetches. The rentals buy use and shed risk in a single line, and for a business that treats certain equipment as a running cost rather than an asset to build, that is the cleaner read.
The residual is where the real money moves, and it moves quietly. An operating lease can look dearer line for line than hire purchase, until you count the obsolescence risk it takes off your hands on an asset you would otherwise be stuck reselling. Hire purchase can look dearer than a lease, until you count the asset you own free and clear at the end. Price the ownership question first; the rate follows it.
On a like-for-like rate the interest is close; the difference sits elsewhere.
Take a business buying £1m of plant with a five-year working life. These figures are illustrative arithmetic at August 2026 rates, not a quote. Both routes ultimately price off the same cost of funds. SONIA sat at 3.73% on 2 July 2026 against a Bank Rate of 3.75%, held at the Bank of England’s June meeting. Bank of England, Bank Rate. On a secured, sensibly geared deal a bank term loan lands at an all-in near 6.75%, a 3% margin over the reference. Asset finance is more often quoted at a fixed rate, but it draws on the same funding cost, so like for like the two land close together.
On rate
Fund the £1m over five years on hire purchase at an APR near 6.75%, and interest across the term comes to roughly £180,000. Fund the same £1m with a term loan amortising over five years at the same rate, and the reducing-balance interest is the same roughly £180,000. Rate is not where these two part company. Both charge for the money at close to the same price, and a headline saving on one over the other is usually the quote, not the cost.
The flat-rate trap
Asset finance is often quoted as a flat rate, and a flat rate is not comparable to an APR. That same £180,000 of interest, expressed as a flat rate on the original £1m over five years, is 3.6% a year, which reads as half the 6.75% APR while being the same money. A flat rate is charged on the whole original balance for the whole term, ignoring the amount you have already repaid, so it runs close to double the equivalent APR. Always convert a flat quote to an APR before you set it beside a loan; the two numbers describe the same cash very differently.
On capacity
Where the routes really part is the balance sheet behind them. The hire-purchase agreement is secured on the machine and sits largely to one side of your main facilities, so it leaves the general debt capacity, and the covenant headroom, that a lender extends against your earnings free for other needs. The term loan consumes that capacity: it draws on the leverage the business can carry and counts in the covenants like any other senior debt. On a single asset that number, not the rate, is what should decide it.
The illustration generalises. Priced honestly on the same basis, asset finance and a term loan cost about the same to borrow the money; the decision turns on ownership, on the cash-flow shape, on the tax read, and on which security you would rather commit, the asset or the whole company.
Match the funding to the life of the asset, and keep general debt for general needs.
Match the funding to the life of the asset, and reach for a term loan only when the asset is not the whole of the spend. The principle is that a depreciating asset should be paid for over the period it earns, not longer and not shorter. Asset finance does this by construction: the term is set to the working life, the instalments fall as the asset produces, and the debt is gone by the time the kit is spent. Because the facility is secured on the machine and held apart from your senior debt, it ring-fences the risk to the asset and preserves the covenant headroom and the whole-business debenture for the things only they can fund, working capital, an acquisition, growth.
A term loan earns its place when the spend is mixed. Asset finance funds the asset and little else, so a programme that is part equipment and part installation, groundworks, fit-out, training or the working capital a new line pulls behind it will not fit inside it cleanly. A term loan funds the whole requirement in one facility, on one set of terms, and where the soft costs are a real share of the project that single line is simpler and often cheaper to run than an asset-finance agreement bolted to a separate loan for the rest. The trade is capacity: a term loan draws on the borrowing the business can carry against its earnings, which is a finite resource you may want for something else, as our guide to how much your business can borrow sets out.
The working method is to split the requirement the way you would split a working-capital package. The hard, resaleable, long-lived equipment is a candidate to fund on asset finance and keep off the main facilities; the soft and mixed costs around it go on general term debt. Where a whole programme of equipment repeats year after year, a standing asset-finance line sized to the capital-expenditure plan is the cleaner tool, and how that sits beside a revolving facility is covered in our guide to RCF versus term loan.
IFRS 16 puts most leases on the balance sheet; the tax read splits by structure.
The accounting no longer separates these routes the way it once did. Under IFRS 16 a lessee brings most leases on to the balance sheet as a right-of-use asset and a lease liability, with narrow exemptions for short-term and low-value assets, and recent revisions to UK GAAP have moved lease accounting in the same direction. The off-balance-sheet appeal an operating lease used to carry has largely gone for the reporting frameworks that apply at this size. Hire purchase and a term-loan purchase were always on balance sheet, as an asset with a matching liability, so on presentation the routes now read more alike than they used to. The exact treatment turns on your framework and the lease terms, which is the first thing to confirm with your accountant.
Tax is where the routes still diverge, and where the real cost can move more than the headline rate. In broad terms, hire purchase and a term-loan purchase let you treat the asset as yours for tax and claim capital allowances on it, with the interest or finance charge deductible; an operating lease is usually a rental, with the rentals deductible as a revenue cost rather than allowances on an asset; and a finance lease sits between the two, its allowance position depending on who is treated as owning the kit. These are the general shapes, not a ruling on your position, and the reliefs available on qualifying plant can shift the arithmetic in a given year. This is exactly the question to put to your accountant before you sign, because the tax read, not the quoted rate, is where two structures at the same headline cost can end up meaningfully apart.
We flag the read; we do not give the tax advice, and neither does the finance provider quoting you. The point for the funding decision is only this: run the after-tax cost of each route, not the sticker rate, and let your accountant confirm the treatment before it is locked in. A structure that looks dearer on the quote can be the cheaper one once the allowances and deductibility are counted, and the reverse is just as common.
Asset finance commits the machine; a term loan commits the company.
What you pledge is the sharpest difference between the two. Asset finance is secured principally on the asset it funds. The lender owns or holds a charge over the machine and looks to it first if things go wrong, sometimes with a personal guarantee or a light charge behind it, but the recourse is largely the kit. Because the security is a specific, resaleable thing rather than a claim on the whole business, asset finance can often reach borrowers a clearing bank’s covenant test would decline: a younger company, a thinner track record, a balance sheet a cash-flow lender reads as fully lent. Where a bank has said no to a general loan, funding the asset on its own security can still be available, as our guide on what to do when a bank declines a business loan covers.
A term loan takes the company. The standard package is a debenture, a fixed charge over the assets that can carry one and a floating charge over the rest, as our guide to debentures and charges explains, and often a personal guarantee from the directors on top. That is heavier security for more flexible money, and it is the right trade when the loan funds the business rather than a single asset. Directors weighing what they are being asked to stand behind should read our guide to personal guarantees before signing either route.
There is a counter-case to each. Asset finance is the wrong tool where the spend is soft, mixed or intangible, because there is no resaleable asset for it to attach to. A term loan is the wrong tool where committing the whole business as security to buy one machine spends covenant headroom you will want for something larger. Match the security you pledge to the thing you are funding, and keep the heavier pledge for the borrowing that needs it.
Asset finance sits alongside the senior facilities, not instead of them.
Asset finance is a complement to the senior stack, not a replacement for it. A typical £3m to £15m borrower runs a term loan and a revolving facility for the business as a whole, and puts individual pieces of equipment on their own asset-finance lines beside them. Because each asset-finance agreement is self-amortising over its machine’s life, the liabilities fall away on their own schedule and rarely drive a refinancing event the way the maturing senior debt does. The equipment lines keep the capital-expenditure plan off the main covenant test, which is much of their appeal at this size, as our read of the all-in cost of debt counts through.
Two things to hold in view when the senior debt does come round to refinance. First, an incoming senior lender will want every asset-finance liability and every charge over the plant disclosed, because a fixed charge on a machine sits ahead of the floating charge on that asset, and the diligence will find it either way, so it is better presented than discovered. Second, the senior refinancing runs to its own clock: our guide to refinancing timing puts the runway at twelve to eighteen months before maturity, and the asset-finance book is part of the picture you bring to it, clean and current, not a loose end found late.
We will put your asset to both routes.
If you are weighing asset finance against a term loan for a piece of equipment or a capital-expenditure programme, a first conversation is confidential and costs nothing. We price both routes on a like-for-like basis, convert every flat quote to an APR so you are comparing the same money, flag the tax read for your accountant to confirm, and tell you plainly which shape keeps your borrowing capacity where you want it. See how a mandate runs in how we work, or the full range of what we advise on in our services.