Asset Refinance | What You Should Know

24-April-2024
24-April-2024 12:27
in Commercial
by Sam Hodgson
Asset Refinance

One of the many financial products available to businesses to help with capital and cash flow, asset refinance is an effective method for raising cash based on your ownership of assets listed on your balance sheet.

Asset refinance, a subset of asset finance, provides an injection of instant capital against your assets - and you don’t even need to own the asset in full to do it.

Read on to learn more about asset refinance, the costs, pros and cons, comparisons to other loan options, and how it can help your business.

What is Asset Refinance?

Asset refinance is essentially a sale-and-leaseback process: you sell your asset to a lender for cash, and they lease it back to you with the cost of monthly payments.

Understanding the fine nuances of business finance can be complicated, and asset refinance comes with its own set of quirks.

At its most basic, it is a way of raising capital equal to the value of your assets, but the specifics of it make it a very powerful tool for business accounting.

From the outside, it is very similar to a secured business loan, leveraged against an asset, but also shares functionally with the process of a finance lease.

Asset Refinance

How Does Asset Refinance Work?

Unlike a secured loan, where the asset remains yours and can be repossessed if loan repayments are not made, asset refinance sells the asset to the lender who then leases it back to you under terms similar to a finance lease or new hire purchase arrangement.

One of the advantages of asset refinance is that you do not need to own the asset in full in order to take advantage of the product - it’s possible to leverage asset finance against assets that you are still paying for under current hire purchase agreements, for example.

In these instances, the finance company would pay off the remaining sum of the hire purchase agreement and lease the asset to you in full, providing you with capital of up to 70% of the asset value.

Asset Refinance

The Difference Between Asset Refinance and Assed-Based Finance

The similarities between asset refinance and asset-based finance, or a secured loan, are great.

Indeed, many finance companies do not make a particular distinction between the two products.

In both, you are able to secure funds against the value of your assets; in both, you can use multiple assets to increase the size of the loan; and both will result in similar interest rates and fees.

The clearest example comes from a commercial mortgage, a specific type of secured (or asset-based) loan. When purchasing property, you obtain the loan for the express purpose of that purchase, leveraged entirely against that property. It is a loan provided to buy the asset itself and thus is not asset refinance.

On the other side of the coin, most asset-based loans will not allow you to leverage an asset that you do not own in its entirety, whereas asset refinance does provide for this situation.

Latest Asset Financing Case Studies

Below is a snapshot of our latest case studies, in which we broker finance solutions for businesses of all shapes and sizes, negotiating the best rates and terms and advising on the correct finance routes:

Large Invoice Finance Facility Secured Despite Overseas Debtors
Large Invoice Finance Facility Secured Despite Overseas Debtors
Area
London
Capital Raised
£2.5m
Fleet of Vans Refinanced to Release £160k for Business Growth
Fleet of Vans Refinanced to Release £160k for Business Growth
Area
Cardiff
Capital Raised
£160k
Fast Asset Finance for Two Tractors at Low Rate | Case Study
Fast Asset Finance for Two Tractors at Low Rate
Area
Somerset
Capital Raised
£558k
Management Buy Out Finance For Funeral Director
£750k Management Buy Out Finance For Funeral Director
Area
London
Capital Raised
£750k
Asset Based Lending Facility for Steel Business | Case Study
Asset Based Lending Facility for Steel Business Management Buyout
Area
Wales
Capital Raised
£1.3m
Anaerobic Digester Plant Refinance For Business Growth
£5.2m Anaerobic Digester Plant Refinance For Business Growth
Area
Wales
Capital Raised
£4.1m

Asset Refinance

What is Asset Refinance Suitable For?

Asset refinance is a significant tool for businesses that are asset-rich but cash-poor.

The addition of new capital funds can be used for any business need, providing a level of flexibility that other finance products may not offer.

Asset refinance can be obtained against a wide range of tangible assets, such as:

In some circumstances, asset refinance is also available against valuable intangible assets such as software or even commercial branding. It’s worth discussing your intangible assets with us to determine how much asset refinancing may be available to you.

Using asset refinance doesn’t usually limit your use of your assets, and you can go on using the equipment or machinery in exactly the same way as you were prior to the arrangement. In terms of business operations, nothing is negatively affected.

Asset Refinance

The Pros and Cons of Asset Refinance

With a wide range of business finance products on offer, it’s important that you choose the right product to suit your needs. Like all loan and finance solutions, asset refinance has its benefits and downsides:

Asset Refinance - 5 Advantages

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1. You do not need to wholly own the asset - Being able to unlock additional capital tied into your business assets, even if they are part owned or are not fully paid off under other asset finance, is one of the considerable advantages of asset refinance. As long as you have significant equity in the asset, then it is possible to obtain asset refinancing.

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2. It can be obtained with a poor credit score - Because asset refinancing is leveraged against an asset that can be repossessed by the financing company should you fail to make repayments, the risk to them is significantly lower than any form of unsecured financing, such as an unsecured business loan or revolving line of credit arrangement. This means far less stress is placed upon your business credit score and asset refinance can be found for businesses that would be otherwise unable to secure finance.

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3. Long repayment terms - Asset refinancing can help you stretch the cost of repayments over many months, lowering the level of monthly debt service to a manageable amount and helping business cash flow.

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4. Acceptable assets are manifold - Asset refinancing is available against a large number of asset types, from vehicles to specialist kitchen equipment, in both new and used conditions.

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5. A cost-effective way of raising capital - Interest rates and fees associated with asset refinancing tend to be quite competitive, making asset refinance one of the most cost-effective ways to obtain additional funds.

Asset Refinance

Asset Refinance - 4 Disadvantages

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1. Assets can be repossessed - Ultimately, if you fail to make payments, the finance company will repossess and sell your assets to mitigate their losses. For many businesses, the loss of a significant and mission-critical asset, especially in a time of financial instability, can be catastrophic and lead to collapse. This potential consequence should be given adequate consideration before taking out asset refinance.

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2. You must maintain the asset - Once asset refinancing is tied to an asset, the onus falls on you to keep it in good condition and it must be insured. If you were previously lax with maintenance and insurance, perhaps to save money, then you will need to take these additional costs into account when calculating the overall monthly expenditure of the asset refinance.

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3. You are paying someone for the privilege - Like all financial products, asset refinance does come with fees and interest. When you borrow money in any form, you are making the lender profit. Asset refinance is no different to other loans in that it is more costly than simply using existing capital for your needs.

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4. You will increase your debt service - Debt service is the level of debt repayment obligations you have and, like your business credit rating, is often used to determine your loan suitability. If your debt service is high, then you may be refused future financing. It’s worth considering the length of your asset refinance arrangement to ensure that your debt service is either kept lower (by increasing the loan term) or paid off sooner to free up availability for future finance plans.

Read more: Debt Service Coverage (DSCR) Loans

Alternatives to Asset Refinance

Asset refinance isn’t the only method businesses have to raise capital when needed. You may like to consider:

  • Secured or asset-based loans - While near identical to asset refinance, if you are looking to purchase new assets with the capital, an asset-based loan leveraged on that purchase may be preferable to asset refinance tied to current assets.
  • Unsecured loans - If your business credit history is in good order, an unsecured business loan may offer a more flexible option with no risk of repossession.
  • Invoice financing - For short-term cash flow solutions, B2B businesses can access a range of lending based on their accounts receivable.
  • Merchant cash advance - Companies who have a large number of credit and debit card transactions can look to merchant cash advances to inject capital based on future card transactions.
  • DSCR loans - Debt service coverage ratio loans look to your debt service level rather than your credit rating to determine suitability and may be an alternative loan type that’s of use to companies struggling with a temporary poor credit score yet have adequate cash flow.
  • Asset finance - Hire purchase agreements, finance leasing, and operational (or contract) leasing are all excellent methods for financing new vehicles, machinery or equipment.
  • Credit cards and overdrafts - For short term cash flow solutions, adding or extending a line of credit facility can provide the extra financial support needed.

Asset Refinance With Clifton Private Finance

For the best asset refinance deals, speak to a specialist asset finance broker. At Clifton Private Finance we have a team specialised in asset refinance who can help you leverage the maximum amount from your asset equity. Speak to us today to find out more.

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