Asset Finance

Let the equipment be the security

Asset finance is an umbrella term, not a single product, and understanding that is the key to using it well. Underneath the label is lending secured against the solar plant itself, the panels, inverters and mounting, arranged in practice as either hire purchase or a finance lease by a specialist renewable or equipment-finance lender. Because the kit is the collateral, you preserve your cash and keep your overdraft and other facilities free for the rest of the business. For a business owner who wants a system without pledging other assets or draining reserves, that is the whole appeal.

How it works

You agree a term, commonly three to ten years, and repay in fixed instalments priced off a reference rate plus a margin that reflects your covenant strength and the term length. The system is installed by an MCS-certified installer and starts generating from day one, so the idea is that the energy saving and any export income help carry the repayments while the asset works for you. Whether you end up owning the system, how it appears on your balance sheet, and who claims the allowances all hinge on one thing: whether the deal is written as hire purchase or as a lease. That is why, with asset finance, the structure matters far more than the label a broker puts on the quote.

Tax follows the structure

Solar PV is special-rate plant, so it does not qualify for full expensing, and it does qualify for the Annual Investment Allowance, giving 100 per cent first-year relief on qualifying spend up to £1m, which covers most business installs. Above that cap a company can use the 50 per cent special-rate first-year allowance, with the balance written down at 6 per cent a year. Under a hire-purchase structure you are usually treated as the owner and claim those allowances yourself; under a finance lease the funder generally owns the asset and claims them, passing the benefit back through the rental pricing rather than a direct claim. VAT at 20 per cent is reclaimable if you are VAT-registered. This is general information, not advice, so confirm the treatment of your specific structure with your accountant before you sign.

What to check before you commit

Read the small print on any option-to-purchase fee, balloon or residual, and on early-settlement terms, since these decide the true total cost. Confirm who is responsible for insurance and maintenance across the term, and make sure the term is not stretched so far that you are still paying long after the savings have peaked. Above all, make the quote state plainly whether it is hire purchase or a lease, because your ownership and tax position follow from that single choice. If you would rather hand ownership and maintenance to a third party entirely, an operating lease or a PPA shifts the risk differently. To see whether asset finance beats buying outright for your building, compare them on real figures with the finance calculator.