What is the difference between capital and asset finance?

How capital or asset financing can help your business

Capital finance is a broad term which encompasses a number of different commercial funding solutions, including fixed term loans, invoice financing, and overdrafts. Capital finance is often used to manage dips in cash flow and provide an injection of capital into the business when needed rather than being ringfenced for one designated purchase.

Asset finance, on the other hand, is a type of commercial loan which allows a company to purchase a named high-value business asset, such as a vehicle or a piece of equipment or machinery, and pay for this through a series of affordable monthly instalments. Asset finance can also be used in reverse whereby a loan is obtained using an existing company asset as security to underpin the borrowing.

As asset finance relies on having a significant named asset as collateral for the loan, it is a type of funding which is available to most companies including start-ups. This is because lenders have the security of the asset to fall back on should the company not be in the position to repay the money owed.

Newly established companies may struggle to secure some types of capital funding without a proven trading history or unblemished credit rating, and it is highly likely any lender would require a personal guarantee to be provided before agreeing to a loan in these circumstances. In these cases, asset finance may be the preferred option for directors looking to make a significant purchase to improve their business operations.

If your company is looking to improve cash flow and is finding it difficult to secure a traditional loan, you may find you have more success by entering into an invoice financing agreement. Invoice finance works by using your sales ledger to release the money tied up in unpaid invoices. This can be an ideal solution for those operating in industries where late payment or extended payment terms is common.

When looking for commercial funding to accelerate your business or smooth gaps in cash flow, it is vital you explore all of the possible options before committing. As many finance agreements run for a number of years, making the wrong decision now could prove to be extremely costly over the length of the borrowing.

At UKBF, our commercial finance experts will take the time to understand your situation and your need for funding, before scouring the market to identify the most appropriate funding option for you and your company. We will then work tirelessly to secure you the funding your company needs at the very best rate possible.