Structure
Asset finance
Asset finance funds a specific asset over its working life, secured largely on the kit itself. On a like-for-like APR it costs about the same as a term loan, so the decision turns on ownership, security and cash-flow shape rather than rate.
Also called hire purchase · equipment finance · finance lease · operating lease · plant and machinery finance
The same £180,000 of interest, quoted two ways. A flat rate reads as half the cost while being exactly the same money.
| Quoted as | Rate |
|---|---|
| Flat rate | 3.60% |
| Equivalent APR | 6.75% |
The published illustration: £1m of plant over five years at an APR near 6.75% costs roughly £180,000 of interest. Expressed as a flat rate on the original £1m across five years that is 3.6% a year. Illustrative arithmetic at August 2026 rates, not a quote.
What it is
Finance for a specific asset, secured largely on that asset, repaid over its working life.
The governing rule is to fund the asset over its life. A machine expected to work for five years is financed over about five years, so the payments and the productive use of the thing being paid for run together and the debt disappears as the asset wears out.
That sounds obvious and it is the discipline the product enforces. A term loan can fund anything over any period, which is its advantage and also how businesses end up still paying for equipment they replaced two years ago.
The three forms
Hire purchase, finance lease and operating lease, and they split on who ends up owning the asset.
Hire purchase runs over the term and at the end you own the asset outright. A finance lease gives you the use of it for most of its working life, with economics close to ownership but without the title. An operating lease is a rental: you use it and hand it back.
The consequence that matters is where the residual risk sits, and it sits with the owner. On hire purchase, if the asset is worth less at the end than anyone expected, that is your loss. On an operating lease it is the lessor's, and you have paid for that protection in the rentals.
So the choice is not really about finance. It is about whether you want to own a particular asset in five years, and about how confident anyone can be today what it will then be worth.
Why the interest is close
Because 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%. 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.
The published comparison makes it concrete. Fund £1m of plant 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. Those are illustrative figures at August 2026 rates rather than a quote.
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 three forms split on one question: who ends up owning the asset, and who carries what it is worth at the end.
| Form | Ownership |
|---|---|
| Operating lease: rent, then return | 3–24 on the scale |
| Finance lease: most of its life | 40–68 on the scale |
| Hire purchase: own it at the end | Residual risk yours |
The published forms ranked by how much of the ownership and residual value the user takes. Residual risk sits with the owner in each case.
The flat-rate trap
Asset finance is often quoted as a flat rate, and a flat rate is not comparable to an APR. This is the single most valuable thing on this page.
That same £180,000 of interest, expressed as a flat rate on the original £1m over five years, is 3.6% a year. It reads as half the 6.75% APR while being exactly the same money.
The mechanism is simple once seen. A flat rate is charged on the whole original balance for the whole term, ignoring the amount you have already repaid. An APR is charged on what you still owe, which falls every month. So a flat rate runs close to double the equivalent APR on a fully amortising facility.
A flat quote has to be converted to an APR before it sits beside a loan. The two numbers describe the same cash very differently, and comparing them directly will make the more expensive option look cheaper roughly half the time.
The security difference
Asset finance has recourse to the kit. A term loan takes a debenture over the business. That is the largest structural difference between them.
A lender secured on an identifiable machine with a resale market is in a different position from one secured on a whole trading company. It can value what it holds, and it knows what happens to that value if things go wrong, so it can often lend more against the same asset than a cash-flow lender would advance against the business as a whole.
That is why asset finance can go further. It is not that the provider is braver; it is that the security is more legible.
It also means the facility is ring-fenced to the kit rather than drawing on the covenant headroom in your main facility. For a business that wants to preserve its senior capacity for something else, that separation is often the whole reason to use the product.
What it does to your capacity
Less than a term loan does, but not nothing, and the difference is worth stating precisely.
Asset finance is ring-fenced to the kit, where a term loan is flexible in what it funds and uses your general headroom. So funding a machine on asset finance leaves more room under the senior facility for an acquisition or a working-capital swing later.
The qualification is that most leases now sit on balance sheet, so the obligation is visible and a cash-flow lender will see it and count it. It does not disappear from the leverage calculation simply because it is documented as a lease.
The practical position is that asset finance uses capacity differently rather than freely. It sits against the asset rather than against the business, it is visible to everyone, and it does not consume the negotiated headroom in the facility you rely on for flexibility.
Rate is not where these part company. Security, capacity and flexibility are.
| Dimension | How much it differs |
|---|---|
| Interest cost, like for like | Close together |
| Tax and accounting treatment | 30–55 on the scale |
| Cash-flow shape | 45–70 on the scale |
| What it uses of your capacity | 60–84 on the scale |
| Security taken | Kit against debenture |
Where an asset finance facility and a term loan differ, by how much each difference matters in practice. A trade-off rather than a ranking, following the source guide: on a like-for-like APR the interest is close.
Accounting and tax
The routes diverge here more than they do on rate, and the answer depends on the form rather than on the product.
Most leases now sit on balance sheet, so the presentational advantage that once attracted borrowers to leasing has largely gone. On the owned routes, capital allowances follow to you as the person carrying the asset. On an operating lease, the rentals are deductible as an expense instead.
Which of those is worth more depends on your tax position rather than on any general rule: a business with allowances it cannot currently use values them differently from one paying full corporation tax. This is a question for your accountant on your specific numbers, and nothing here is tax or accounting advice.
The point to hold is simply that the tax and accounting read is a real term of the deal and belongs in the comparison alongside the rate, not after it.
Which route for which kit
The structure follows how the asset ages, which is the most reliable rule in this area.
Long-lived plant that will still be useful and valuable in a decade should be owned, whether through hire purchase or a term loan. Paying rent forever for something that does not obsolesce transfers value to a lessor for no reason.
Fast-dating kit is the opposite case. Technology that will be superseded, or equipment whose residual value cannot be predicted, suits an operating lease, because handing the residual risk to somebody whose business is managing it is worth what it costs.
The awkward middle is assets with long lives and uncertain residual markets, specialised plant with few buyers. There the honest answer is that ownership carries a real risk that is hard to price, and the finance decision should follow a view about the asset rather than a preference about the facility.
Maturity and runway
Asset finance is self-amortising and falls away, which is a genuine advantage and a small trap.
Because the facility repays over the asset's life, it disappears without a refinancing event. There is no bullet to deal with and no cliff, which is a real difference from a term loan that may need refinancing at maturity while the business is doing something else.
The trap is that the capacity disappears with it. A business that funded its plant on asset finance and now needs to replace that plant is starting again, and the earnings that were servicing the old facility are only free once it has fully run off.
The replacement cycle wants planning against the amortisation profile, with the conversation about the next facility twelve to eighteen months out. That is early enough to have options and late enough for the numbers to be real.
Common questions
What is asset finance?
Finance for a specific asset, secured largely on that asset and repaid over its working life. The rule is to fund the asset over its life, so the payments and the productive use of the thing being paid for run together and the debt falls away as the asset wears out.
Is asset finance cheaper than a term loan?
Not materially, on a like-for-like basis. Both price off the same cost of funds. Funding £1m of plant over five years at an APR near 6.75% costs roughly £180,000 of interest either way, so a headline saving on one over the other is usually the quote rather than the cost.
What is the flat-rate trap?
A flat rate is charged on the whole original balance for the whole term, ignoring what you have already repaid, so it runs close to double the equivalent APR. That same £180,000 of interest expressed as a flat rate on £1m over five years is 3.6% a year, which reads as half of 6.75% while being identical money. Always convert to an APR before comparing.
What is the difference between hire purchase and a lease?
Who ends up owning the asset. Hire purchase ends with you owning it outright and carrying the residual value risk. A finance lease gives you use for most of its working life without the title. An operating lease is a rental: you use it and hand it back, and the residual risk stays with the lessor.
Does asset finance use up my borrowing capacity?
Differently rather than freely. It is ring-fenced to the kit and has recourse to the asset rather than a debenture over the business, so it leaves senior headroom for other things. But most leases now sit on balance sheet, so a cash-flow lender will see the obligation and count it in leverage.
Why can asset finance sometimes lend more?
Because the security is more legible. A lender secured on an identifiable machine with a resale market can value what it holds and knows what happens to that value in a bad outcome, where a cash-flow lender is secured on a whole trading business.
Which form suits which equipment?
The structure follows how the asset ages. Long-lived plant that stays useful and valuable should be owned, on hire purchase or a term loan. Fast-dating kit with unpredictable residual value suits an operating lease, because handing the residual risk to someone whose business is managing it is worth what it costs.
When should I refinance an asset facility?
Twelve to eighteen months out is when the conversation still has options in it. Asset finance is self-amortising and falls away without a refinancing cliff, but the capacity disappears with it, so a business needing to replace the plant is starting again with earnings that only free up as the old facility runs off.
The full treatment sits in the guide: asset finance vs term loan.
This page explains a term as it is used in the UK lower-mid-market. It is general information, not advice on any particular facility. Terms vary between lenders and between deals, and the drafting in your own agreement governs.