Did you know that it’s possible to free up cash from your valuable business assets without having to part ways with them? With asset refinance you can do exactly that.
In this guide we walk you through how asset refinance works, who it’s suitable for and explore all of the key considerations for businesses. Learn more below or get in touch with an expert if you’d like to discuss asset refinance options for your business.
Table of Contents
What is Asset Refinance?
Asset refinance taps into the equity of your owned assets (fully or partially owned), allowing lenders to provide a loan based on its value. For example, if you are paying off a hire purchase agreement on a piece of equipment, you can leverage the equity in the equipment for additional financing. The new lender typically pays off the original one and provides a lump sum based on your asset's equity.
The advantage is that you don't need full ownership; the offer is based on current equity. While refinancing is limited by the asset's value, you can unlock cash with enough equity, even if you haven't fully paid off a hire purchase agreement.
How Does Asset Refinance Work?
Let's explore how asset refinance works with a quick example:
John's construction firm acquired a machine worth £100,000 through a hire purchase agreement, and now has only £10,000 left to pay. This implies that John has £90,000 equity in the machine - his company owns nine-tenths of it, and the hire purchase provider owns the remaining tenth.
Given the right type of machine, John could refinance it up to the value of about £60,000 (60% of the item’s overall value). The refinance lender would settle the remaining £10,000 with the hire purchase firm, secure a charge over the asset, and lend John £60,000 based on its value.
In essence, asset refinancing involves transferring ownership to a new lender while retaining the ability to use the asset, akin to a lease arrangement with monthly payments. This arrangement is commonly referred to as a sale and leaseback agreement, and it is usually structured as a finance lease or lease/hire purchase agreement.
The new lender will typically settle the balance with the original lender (such as the hire purchase company), providing you with a lump sum based on the equity you possess in the asset.
Upon the agreement's conclusion, ownership usually reverts to your business. Failure to meet payments can result in the new lender repossessing the asset to recover outstanding amounts.
The value of equity in asset refinance:
Consider a scenario in which Sarah owns a machine worth £50,000, financed through a hire purchase agreement, with only £5,000 remaining. Sarah possesses £45,000 equity in the machine, representing 90% ownership. Now, if Sarah owned the asset outright, her equity would equal the full £50,000.
This principle extends to various assets accepted as security. For instance, if Sarah owned a commercial property valued at £1 million, with a remaining commercial mortgage of £400,000, she effectively owns an asset worth £600,000. This equity could potentially be leveraged for refinancing and securing a loan based on that value.
Is Asset Refinance Suitable for My Business?
Asset refinance is a viable choice if your business has valuable assets but faces a shortage of cash. Whether you aim to acquire a new piece of equipment with the freed up finances or alleviate cash flow, asset refinance offers a flexible solution to meet your business needs.
As highlighted above, you don't need to own the asset outright. Instead, lenders will assess the equity or share you currently hold in the asset. So if you've acquired equipment through a hire purchase agreement and still owe money to the provider, you can secure financing against the partially owned asset.
Advantages of Asset Refinance
Here's a summary of the main advantages of choosing an asset refinance agreement:
You can spread the cost of acquiring business assets, typically over a period of up to 5 years.
You can choose between purchasing, renting, or refinancing assets based on the selected product.
It's applicable to a broad range of new and used assets, including equipment, machinery, and vehicles.
Adverse credit is often not a hindrance, as it with some other business finance products
Disadvantages of Asset Refinance
Despite its merits, as with any finance product asset refinancing comes with some drawbacks to consider too:
Higher costs: Compared to using your own funds for an outright purchase, asset refinancing is more expensive due to interest and associated service charges.
Collateral risk: Commercial Asset Finance products use the financed asset as collateral, putting it at risk of removal from your business if you fall behind in the repayment scheme.
Maintenance responsibility: While under your care, you are responsible for maintaining and preserving the asset, including handling repairs and securing a suitable insurance policy.
Upfront expenses: Depending on the product, you may be required to make a deposit or pay the first month's payment upfront, subject to negotiation.
It's important to carefully weigh up these advantages and disadvantages to determine if asset refinancing aligns with your business needs and financial goals. Speaking to an asset finance broker can really helpful when considering the best finance option for your business.
Alternatives to Asset Refinance:
There are several alternatives to asset refinance that can help you to achieve your businesses financial goals, too. Depending on your intended use for the funds, you might want to consider learning more about the following business finance options:
Ideal for funding various business needs, business loans provide a lump sum that can be used for purposes such as expansion, inventory purchase, or working capital. They offer flexibility in terms of repayment structures and interest rates.
Particularly useful for short-term financing needs, bridging loans bridge the gap between immediate financial requirements and the eventual, more permanent financing solution. They are commonly used in scenarios such as property transactions or during periods of financial transition.
Vehicle finance is specifically tailored for businesses needing to acquire vehicles. This financing option allows you to spread the cost of purchasing or leasing vehicles over a predetermined period, making it a practical solution for businesses requiring a fleet of vehicles for operational purposes.
For businesses looking to acquire or refinance commercial property, commercial mortgages offer long-term financing solutions. This option allows you to spread the cost of property acquisition or development over an extended period, providing stability for your business.
Aimed at supporting property development projects, development finance provides the necessary funding for construction, renovation, or expansion. It's tailored for businesses involved in property development and offers flexibility in repayment terms.
Whereas with asset refinance you need to already own (or partly own) the asset, there are other forms of asset finance where you don't need to secure it against an asset, such as hire purchase, finance lease or an operating lease.
Each option comes with its unique features and advantages, enabling you to tailor your financial strategy to suit your specific needs and circumstances.
Asset Refinance FAQs
What types of assets can be considered for refinance?
Most tangible business assets can be considered, such as machinery, vehicles, equipment, and more.
How does asset refinance differ from selling assets?
Asset refinance allows you to retain the use of your assets while accessing capital. Selling assets involves giving up ownership entirely.
What are the benefits of asset refinance over traditional loans?
Asset refinance provides a more accessible route to capital with potentially lower interest rates, leveraging the value of your assets.
Will my business's credit history affect the approval process?
While credit history is considered, asset refinance is secured by the asset itself, making approval more achievable than unsecured loans.
Can I refinance multiple assets?
Yes, you can refinance multiple assets, provided they meet the necessary criteria.
How long does the asset refinance process typically take?
The timeline varies, but the process is often quicker than traditional loan applications, allowing you to access funds sooner.
Ready to apply?
We've helped lots of businesses like yours with successful asset refinance applications. If you want to explore asset refinance as an option for your business, check your eligibility online today or get in touch with us to learn more.