Plant and machinery finance: funding diggers, kit and production lines

An excavator, a telehandler, a CNC machine, a bottling line, a tractor. They have three things in common: they cost a lot, they earn money for years, and they hold at least some of their value. That last point is why financing plant is often easier than borrowing for almost anything else.

This guide covers how plant finance works, the choices that change its cost, and what lenders look for.

What counts as plant and machinery

Lenders use the term loosely. It usually includes:

• Construction plant: excavators, dumpers, rollers, telehandlers, cranes and attachments.
• Agricultural machinery: tractors, combines, sprayers and handling equipment.
• Materials handling: forklifts, reach trucks and warehouse equipment.
• Manufacturing and engineering: CNC machines, presses, lathes, packaging and production lines.
• Other kit: generators, compressors, printing presses and recycling equipment.

The more standard and mobile the asset, the easier it is to fund. A compact excavator from a well-known manufacturer can be sold anywhere in the country. A production line built for one factory can't.

How plant finance works

The lender buys the machine from the dealer or manufacturer and you pay for it over an agreed term, often three to five years, sometimes longer for long-life assets. The machine is the main security, so you may not need to put up property or other assets, although directors of limited companies are often asked for a personal guarantee, especially for younger businesses.

The two main structures are:

• Hire purchase (HP). You pay a deposit and, normally, the VAT up front, then fixed instalments. You own the machine after the final payment. HP suits plant you'll keep for most of its working life.
• Leasing. You rent the machine and never own it. VAT is added to each rental, so there's no large VAT bill at the start. A finance lease suits long-term use without ownership. An operating lease or contract hire suits kit you'll replace regularly, and may include servicing.

For most yellow plant and agricultural machinery, HP is the common choice, because these assets hold value and owners tend to keep them. Our guide to hire purchase vs leasing compares the VAT, tax and end-of-term options in detail.

There's also a third question before either: should you buy at all? If you'll only use a machine for a few weeks a year, hiring it as you need it may cost less than owning it, and keeps the maintenance and depreciation off your books.

New or used?

Both can be financed. The trade-offs:

• New plant comes with a warranty, the latest efficiency and emissions standards, and sometimes subsidised finance from the manufacturer or dealer. It loses value fastest in its first years.
• Used plant costs less and has already taken the steepest fall in value. Lenders will fund it, but they'll look harder at its age, hours and condition, and may limit the term so the finance ends well before the machine is worn out.

Many lenders will fund plant bought from a dealer more readily than plant bought privately or at auction, because it's easier to confirm the machine exists, is what it claims to be and isn't already financed by someone else. If you're buying privately, ask the lender early what it needs.

What lenders value

A plant lender is asking one question: if this goes wrong, what could we sell the machine for, and would it cover what's still owed?

That leads lenders to look at:

• The resale market. Well-known makes and models with plenty of buyers are the easiest to fund. Specialist or bespoke machines are harder.
• Age and hours. Most machines record working hours, and lenders treat hours much like mileage on a van. High hours mean a shorter term or a lower advance.
• Condition and history. Service records, inspection reports and any repairs.
• How portable it is. Mobile plant can be collected and sold. A machine bolted to a factory floor costs money to remove before it can be sold, and is worth less to a lender.
• Your business. Your accounts, bank statements and track record still matter, especially for larger amounts or specialist kit.

Production lines and specialist machinery

Production lines and bespoke machines are fundable, but expect differences. A larger part of the cost is often soft costs, such as installation, integration, software, training and building work, which have little or no resale value. Lenders may fund these at a lower percentage, ask for a bigger deposit, shorten the term or want additional security. Some will fund soft costs as part of a wider package if your business is strong.

Repayments that fit your work

Plant earns money unevenly. A groundworks firm is busiest in summer, and a farm's income may arrive in a few large payments a year. Many asset finance lenders can shape repayments to fit, for example:

• Seasonal profiles, with higher payments in your busy months and lower ones in quiet months.
• Deferred starts, where the first payment is delayed for a period while the machine starts earning.
• Stepped repayments that rise over time as a new contract or line ramps up.
• A balloon, a larger final payment that lowers the monthly cost. You owe it in full at the end, so plan how you'll pay it.

These aren't available on every deal, and changing the shape doesn't make the finance cheaper. Deferring payments usually increases the total cost, so ask for the total amount repayable under each option.

Refinancing plant you already own

If you own plant outright, or have a lot of equity in it, you can often borrow against it. This is called asset refinance. The lender buys the machine from you, or takes security over it, and you pay it back over a new term while carrying on using it. It can release cash for working capital, a new contract or to clear more expensive debt.

The lender will usually want a valuation, proof that you own the machine outright, and details of any finance still on it. Our guides to sale and leaseback and refinancing business debt explain when this makes sense and when it doesn't.

An illustration. A contractor wins a three-year earthworks contract and needs a £90,000 excavator. On hire purchase with a 10% deposit, it pays £9,000 plus the VAT up front, then finances the rest over four years with lower payments over the winter months. A year in, it also refinances two dumpers it owns outright, releasing cash to cover the wages before the first stage payments arrive. These figures are illustrations, not quotes: your terms depend on your business and the machines.

Tax and VAT, briefly

On hire purchase, the VAT on the full price is normally paid up front. If you're VAT-registered, you can usually reclaim it on your next return, so it's a timing cost. On a lease, VAT is added to each rental.

On tax, the Annual Investment Allowance (AIA) lets most businesses deduct the full cost of qualifying plant and machinery from their profits in the year it's bought, up to an annual limit (£1 million at the time of writing). It applies to new and used plant, and assets bought on hire purchase can qualify. Leased assets don't, because you don't own them. Companies may also be able to claim other allowances on new plant. The rules are on GOV.UK's capital allowances pages, and your accountant can tell you which allowance suits your purchase.

Hire purchase and leasing agreements with limited companies and LLPs are generally unregulated. Agreements of £25,000 or less with sole traders and small partnerships are regulated by the FCA.

Common mistakes

• Financing for longer than the machine's useful life. You don't want to be paying for a machine you've already replaced.
• Ignoring hours. A cheap used machine with very high hours may be hard to finance, costly to run and worth little at the end.
• Forgetting the up-front VAT on HP. Budget for it, or ask whether the lender can fund it until you reclaim it.
• Buying kit you'll rarely use. Compare the cost of finance with the cost of hiring when you need it.
• Comparing monthly payments, not totals. A balloon or a deferred start can make a deal look cheaper than it is.

Questions people ask

Can I get finance on used plant?

Yes. Most asset finance lenders fund used plant, especially from a dealer. They'll look at its age, hours, condition and resale value, and may shorten the term for older machines.

Is hire purchase or leasing better for plant?

Hire purchase suits plant you want to own and keep, and usually lets you claim capital allowances. Leasing suits kit you'll replace regularly, and spreads the VAT across the rentals. Your accountant can compare the tax effect for your business.

Can I refinance machinery I already own?

Often, yes. Asset refinance lets you borrow against plant you own, and repay over a new term while you keep using it. Lenders usually want a valuation and proof that there's no other finance on the machine.

Can plant finance repayments be seasonal?

Many asset finance lenders can offer seasonal, stepped or deferred repayments to match when your income arrives. It's not available on every deal, and deferring payments usually increases the total cost, so compare the total amount repayable.

Do I need a deposit for plant finance?

Not always, but a deposit is common, and it helps with older or specialist machines. On hire purchase you'll also normally pay the VAT up front, which VAT-registered businesses can usually reclaim later.