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Asset Finance Rates | With Free Quote
Asset finance is one of the best ways for a business to have the buying power it needs to grow.
With a range of products designed for both the purchasing of assets, or utilising those assets to free up equity as capital for future expansion, loans and financial products that use assets as collateral are available to every business in the UK.
But is asset finance actually the most cost-effective option? How are asset finance rates calculated and how does it all work? Here at Clifton Private Finance we have the answers.
And for a quick quote, use our calculator below:
Current Asset Finance Rates
Currently, the best asset finance rates on the market range between 6.87% - 15.04% per annum.
The best rate you can achieve will depend on 4 main things:
- The UK Economy and the Bank of England Base Rate
- Competition and the Marketplace
- Your Business Creditworthiness
- The Asset You're Buying
We'll go into all of those factors in more detail later in this article.
Contents
How Does Asset Finance Work?
Asset Finance Case Studies
How Are Asset Interest Rates Determined?
Examples of Asset Finance
Compare Rates With Us
How Does Asset Finance Work?
The Core of Asset Finance
While each asset finance option has its own fine points that can make one seem very different from another, they all work on the same basis:
- Money is provided by a lender with an asset linked to that loan as collateral.
- Interest is added.
- Loan repayments are made each month.
- If the loan repayments aren’t met, then the asset is repossessed and sold to cover the debt.
- Once all loan repayments are met, then the asset is either returned to the lender or becomes the property of the borrowing company - this depends on the specific type of asset finance.
At its core, asset finance is borrowing that is guaranteed with an asset.
How Depreciation Affects Asset Finance
Assets depreciate - which is to say they become less valuable with time.
Take a car. On the day you buy it, it is new and shiny and the best on the market, but a year later it’s been driven around and a new model is coming out. Fast forward three years, and it’s looking a bit tired. Ten years plus and it’s being sold on for a fraction of its original price.
The same is true with most assets: IT equipment, furniture, the newest AI-driven software… What was once new (and expensive) becomes everyday and considerably cheaper.
As asset finance represents a business loan linked directly with an asset, the value of that asset as collateral decreases in line with depreciation. This means that repayments must cover three things:
- Any interest
- The depreciation of the asset
- Any additional repayment of the principal
With the flexibility of asset finance, some types of asset finance (contract lease, for example), have cheaper monthly repayments because the principal is never repaid, while others, such as hire purchase aim to result in eventual ownership for the borrower and have higher monthly repayments to lower the balance and pay off the loan in full.
A term often used in asset finance is the balloon payment. This is a one-off final payment that pays off the remaining balance at the end of the contract term. Higher monthly repayments result in lower balloon payments and vice versa.
Asset Finance Case Studies
Read some of our most recent asset finance case studies below for real examples of how asset financing works in practice, from operating leases to hire purchase agreements:
How Are Asset Interest Rates Determined?
Obtaining a good interest rate is key for maximising the cost-effectiveness of your asset finance, but what factors affect asset finance rates? For the lenders, it’s all about risk…
Interest payments are the profit that a finance provider makes for lending you the money and are calculated based on several factors.
1 - The UK Economy and the Bank of England Base Rate
The base rate is set by the Bank of England and dictates the cost banks face when lending money to each other. Balancing the base rate is a complicated process managed at a governmental level.
If the base rate is very low, then borrowing is cheap and people will take out loans and spend more, which ultimately pushes inflation and the cost of living up. If the base rate is very high, then people spend less and save more, stifling growth but bringing inflation down to a manageable level.
It is a constant balancing act that is itself, determined by myriad other external factors.
Related: Are interest rates going down?
2 - Competition and the Marketplace
The second factor in determining the rate of interest for asset finance is the number of lenders in the marketplace and their competition.
If one lender is offering finance products for a very low rate, then other lenders will have to lower their rates or risk losing their customers. Similarly, a lender who raises their rates above the level of the general marketplace can expect to have fewer interested borrowers.
The funding landscape is always in flux and rates can change daily.
This demonstrates the value in using an asset finance broker. We have the ability to compare rates quickly across the market.
3 - Your Business Creditworthiness
For the lender, interest rates are a way to mitigate risk. If you present a significant risk, then the lender will want to make more from the investment, as they are gambling somewhat on it being returned.
If you are low risk, more lenders will be willing to offer you asset finance, reassured that they will see their money repaid in full with few problems.
Your business credit rating is the metric by which lenders can measure your creditworthiness. A strong credit score will mean you are offered lower asset finance rates, while a poor business credit history will mean rejection from some lenders and increased interest rates from others as they seek to balance the risk to reward ratio.
Asset finance is advantageous to those with poor credit ratings as the additional risk mitigation offered through the collateral is considerable.
Applicants with bad credit will be far more successful, and see far cheaper interest rates, with asset finance than with any unsecured business loan.
4 - The Asset
By its nature, asset finance is heavily linked to the asset. The security provided by the asset, however, is only valuable if it can be realised. This means that the lender will consider the market for the assets liquidation when determining interest rates.
For this reason, assets such as vehicles or in-demand IT equipment represent a better level of collateral than items such as furnishings or specialised equipment.
Lenders will be willing to offer asset-based finance on a huge range of assets, including intangible assets such as trademarks or accounts receivable, but interest rates for these difficult-to-realise assets may be less advantageous.
Examples of Asset Finance
Consider the following simplified example of a company car with an initial purchase cost of £50,000. At the end of a 36 month (three year) lease contract, it is expected to have a resale value of £20,000. This represents a total depreciation of £30,000. Interest on the loan is calculated to be 5% APR.
Contract Lease Example
In a contract lease example, where only depreciation and interest are paid for and the asset reverts to the lender at the end of the term, monthly repayments would be calculated as follows:
Monthly depreciation is calculated as £30,000 (the depreciation over three years) divided by 36 (the number of months of the contract). Depreciation is £833.33 per month.
Monthly interest is calculated as 5% of £50,000 each year (£2,500), which is divided by 12 for each month. Interest is £208.33 per month.
- Depreciation: £833.33 per month
- Interest: £208.33 per month
- Total monthly payment: £1041.66 per month
Note that at the end of the term, under contract lease, the vehicle would return to the leasing company.
Finance Lease Example
For a finance lease, the option to purchase at the end of the term exists. For this example, the business has asked for a balloon payment of only £8,000 at the end of the term, spreading the cost of the final payment throughout the three years.
For simplicity, both depreciation and interest are calculated as above. Note that in a real world example, the interest would be adjusted due to the partial repayment of the balance.
Monthly additional repayment of the balance is calculated as £20,000 (the final value of the car) minus £8,000 (the agreed balloon payment), then divided by 36 to spread that repayment over the full three years. Repayment is £333.33 per month.
- Depreciation: £833.33 per month
- Interest: £208.33 per month
- Balance repayment: £333.33 per month
- Total monthly payment: £1375.00 per month
- Final balloon payment at end of contract: £8,000
With the final balloon payment, the car would become the property of the business.
Hire Purchase Example
The structure of a hire purchase agreement looks more like a standard loan, even though it breaks down very similarly to the finance lease version. The biggest real world difference with a hire purchase agreement is in the addition of a first deposit payment, typically of around 20% of the total.
This is similar to the finance lease balloon payment but comes at the beginning of the finance agreement rather than the end.
With a hire purchase agreement, the interest would be lessened also, as the balance lowers and the interest lowers in line with it.
Again, for our example, figures for interest have been simplified.
After the deposit is paid, the interest would be calculated on the sum of £40,000. This provides a monthly interest portion of £166.67.
- Initial deposit: £10,000
- Balance repayment: £1111.11 per month
- Interest: £166.67 per month
- Total monthly payment: £1277.78 per month
At the end of the three-year contract, the car would be the property of the business.
Get the Best Asset Finance Rates with Clifton Private Finance
At Clifton Private Finance, we have a dedicated team of asset finance specialists with the expertise needed to find you the most beneficial asset finance deals available.
With years of experience and strong relationships with the top UK banks and other lenders, our advisors will scour the whole UK asset finance landscape to find the products with the most competitive asset finance rates for your business. Contact us today to discover how your company can grow with specialist asset finance.
