Asset Finance for UK SMEs: HP, Leases and Refinance

What asset finance is and how it works

Asset finance is a broad term covering lending arrangements where the asset itself secures the facility, meaning lenders look primarily at the asset's value and condition rather than solely at your business's credit history. The lender either purchases the asset and makes it available to you, or lends against an asset you already own.

UK asset finance is largely unregulated for business borrowers, though lenders writing regulated consumer agreements fall under FCA oversight. For limited companies, LLPs and partnerships, transactions are almost always unregulated commercial arrangements governed by the Consumer Credit Act exemptions. The Finance and Leasing Association (FLA) is the principal trade body and publishes monthly statistics on new business written across the sector.

Hire purchase: ownership at the end

Hire purchase (HP) is the simplest structure: you pay a deposit, make fixed monthly instalments over an agreed term, and ownership transfers to your business when the final payment is made. Because the asset appears on your balance sheet from day one, your business can claim capital allowances, including the annual investment allowance where eligible.

HP terms typically run from 12 to 72 months. Interest is calculated on the original capital balance rather than a reducing balance in most fixed-rate structures, so the effective annual rate depends on the term. Rates as of mid-2026 vary widely by asset type and business profile, but prime-quality borrowers with established trading histories are seeing HP rates in the range of 5 to 9 per cent per annum above a base-rate-linked benchmark or on a fixed basis. HP suits businesses that intend to keep the asset long-term and want a clear path to ownership.

Finance lease: use the asset without owning it

Under a finance lease, the lender (lessor) owns the asset throughout the agreement and your business (lessee) uses it in exchange for regular rentals that recover substantially all of the asset's cost over the primary term. Because you do not own the asset, it may be treated differently under your accounting standards, though under IFRS 16 and FRS 102 most finance leases are now recognised on balance sheet.

At the end of the primary period you can typically extend the lease at a peppercorn rental, sell the asset on behalf of the lessor and retain most of the proceeds, or return it. Finance leases can be VAT-efficient for VAT-registered businesses because rentals carry VAT that is usually recoverable. They are popular for plant, commercial vehicles and printing equipment where the business wants to use rather than own the machinery.

Operating lease: off-balance-sheet rental

An operating lease is a shorter-term rental arrangement where the lender retains meaningful residual value risk at the end of the term, meaning your payments do not cover the full asset cost. The practical effect is lower monthly payments compared with HP or a finance lease on the same asset.

Pre-IFRS 16 the operating lease was widely used to keep assets off balance sheet entirely, but for most UK companies applying IFRS 16 or FRS 102 Section 20, even operating leases now create a right-of-use asset and a corresponding liability. Operating leases remain popular for company cars, IT hardware and other assets with predictable depreciation curves and active secondary markets. The lender's ability to remarket the asset at residual value is central to the pricing, so asset type and condition matter significantly.

Asset refinance: release equity in kit you own

Asset refinance (sometimes called sale and HP back or sale and leaseback) allows your business to sell an asset it already owns to a finance company and lease or hire it back, releasing the equity as a lump sum. This is useful when you need working capital but do not want a conventional loan.

The amount advanced is typically 70 to 80 per cent of the asset's current open-market value, assessed by the lender or an independent valuer. Eligible assets include commercial vehicles, manufacturing machinery, agricultural equipment and print or packaging plant. The asset must be unencumbered or have sufficient equity above any existing charge. Lenders will check the asset register at Companies House for existing fixed or floating charges before proceeding. Refinance can be structured as HP back, giving you a path to re-ownership, or as a finance lease if outright re-ownership is not the priority.

What lenders assess before approving asset finance

Lenders weigh the asset, the borrower and the deal structure together. The asset's age, condition, resale market and whether it is hard or soft (hard assets such as vehicles and plant hold value better than soft assets such as bespoke software installations) directly affect the advance rate and pricing.

For the business, lenders typically review the last two to three years of filed accounts, recent bank statements and, for larger facilities, management accounts. A limited company or LLP should ensure Companies House filings are current before applying, as lenders routinely check. Personal guarantees from directors are commonly requested on smaller facilities, particularly for businesses trading fewer than three years. Most mainstream asset finance lenders have minimum annual turnovers of around £100,000 to £250,000 for SME facilities, though specialist lenders will consider start-ups where the asset quality is strong.

Costs, fees and things to check in the agreement

The total cost of asset finance includes the interest or rental charge, documentation fees, option-to-purchase fees on HP agreements, and any early settlement charges. Always ask for the total amount payable and the implicit APR or flat rate so you can compare facilities accurately.

Documentation fees of £250 to £750 are common on smaller deals; larger facilities may carry arrangement fees of 1 to 2 per cent. Settlement figures on HP agreements may include a rebate of future interest calculated under the Rule of 78, which means early settlement in the first half of the term saves relatively little. Check whether the agreement includes a balloon or residual payment at the end, as this reduces monthly instalments but creates a lump-sum liability. For VAT-registered businesses, confirm whether VAT is charged upfront on HP (full VAT on the asset at commencement) or on each rental instalment as with leases.

Step-by-step

1. Identify the asset: confirm age, condition, current market value and whether it is encumbered.
2. Choose the structure: HP if you want ownership; finance lease if you want use and VAT efficiency; operating lease for lower payments; refinance if you already own the asset.
3. Gather documents: last two years filed accounts, three to six months bank statements, asset invoice or valuation, proof of existing finance if refinancing.
4. Submit an enquiry: a broker or direct lender will issue an indicative terms letter, typically within 24 to 48 hours for standard assets.
5. Formal credit application: lender conducts full underwrite, may instruct a physical inspection for high-value or specialist assets.
6. Receive credit approval and review the agreement: check total amount payable, option-to-purchase fee, early settlement terms and any balloon payment.
7. Sign and drawdown: for HP the lender pays the supplier directly; for refinance the lender pays your business and the asset is transferred to the lender's name.

Example

Frequently asked questions

By Oliver Mackman, Director, Best Business Loans Ltd. Last reviewed 2026-06-18.