What is Asset Refinancing?

In an uncertain financial climate, many business owners are keeping a close eye on their cash flow.

For businesses that often have a large amount of their cash tied up in assets they need to operate their business, this can be a particularly difficult time.

This is where Asset refinancing, a particular branch of asset finance could be of use, allowing a business to raise finance against an asset their business possesses whilst allowing them to keep using the asset in normal business operations.

In this guide you’ll learn what asset refinance is, how it works, and what the potential advantages and disadvantages of using it are.

As with all financial decisions it’s a good idea to seek independent specialist advice to determine what is right for your circumstances and business before committing to any financial product.

What is asset refinance?

Asset refinance is method of freeing up cash from assets in your business that you already own.

It’s different to asset finance in that you are borrowing against an asset you already have in your possession, rather than asset finance which helps you gain access to additional business assets that you don’t already own.

Types of assets you can use as security for asset refinancing include things like machinery, equipment, vehicles, or commercial property.

The amount a lender might offer you depends on a few things - the type of asset, its condition, how old it is, and the percentage that you own (your equity).

The term will also depend on the working life of the asset you are using as security.

A key characteristic of asset refinancing is that you don’t need to own 100% of the asset you put up as security.

When assessing your application, a potential lender will take into account how much of an asset you own, or your 'equity'.

For instance, if you have equipment from a hire purchase deal and still owe some money on it, you could still get more finance using this asset.

This does mean that the amount you can borrow against your asset is limited by the value of the asset itself, for example you cannot borrow £15,000 secured against an asset only worth £10,000 like a vehicle, but providing you have enough equity in the asset, you could still unlock a substantial amount of funding.

The new lender will often pay off your old lender (the hire purchase company) and give you a cash amount based on how much of the asset you own.

Basically, you transfer ownership of the asset to the new lender but keep using the asset, paying them monthly.

This is why asset refinance is sometimes called a 'sale and leaseback agreement'.

These contracts are usually set up as a finance lease or lease/hire purchase deal. Check out our leasing and hire purchase checklist.

When the deal ends, you usually take ownership of the asset as you have repaid the sum lent to you by the lender.

However, it’s worth remembering that, if you don't make payments, the asset refinancing lender can take the asset to get back the money you owe.

In this sense, asset refinancing works similarly to a secured loan.

How does asset refinancing work?

To understand how asset refinance operates, let's consider the following hypothetical example.

Imagine that Anna's catering company owns a commercial oven worth £20,000.

She initially bought it through a hire purchase agreement and now only has £2,000 left to pay.

Thus, she has £18,000 of equity in the oven, meaning Anna's firm owns 90% of the oven, while the remaining 10% is owned by the hire purchase provider.

Given that it's a suitable type of asset, Anna could potentially refinance the oven up to about £14,000, which is 70% of the oven's total value.

The refinance lender would settle the remaining £2,000 with the hire purchase firm, assume control over the asset, and lend Anna £14,000 based on its value.

The asset refinancing works in a similar way if Anna owns the commercial oven outright, but she might be able to borrow even more money as a result due to her having more equity.

Why use Asset refinancing?

Asset refinancing could be worth considering if your business is asset-rich but cash-poor as it allows you to borrow against those assets on your balance sheet to inject a cash lump sum into your business.

This could then allow you to invest that cash into other assets such as a commercial property or a new vehicle fleet or just be used to build up working capital or boost cash flow.

Whilst traditional hard assets such as equipment, commercial vehicles or property are often used to secure asset refinance, some lenders also allow you to use your businesses’ intangible assets such as licensing, software or branding as security.

An intangible asset is one that, if you were to lose it, would stop your business operating as efficiently as usual, and therefore has value.

Advantages of asset refinance

There are a number of advantages to using asset refinancing as a way of unlocking working capital.

You don’t need to own the asset you offer as security

Businesses often use various types of debt finance, such as business loans or even other forms of asset finance, to support the purchase of equipment for their operations.

Asset refinance allows a business to use those assets as security to access further financing even if you don’t yet own the asset outright.

You can choose the asset

Asset refinance involves only the assets you currently own, providing you with the flexibility to select which ones you'd like to offer as collateral based on your specific needs and circumstances.

Generous repayment terms

With asset refinance a business can spread the repayment terms, usually up to a term of five years.

A wide range of assets can be used

With asset refinance a business can use a number of different types of assets to access funding.

These include both new and used assets including vehicles, property, and equipment.

Poor credit might not an issue

Due to the nature of asset refinance, adverse credit isn’t usually a problem for a business seeking to unlock capital.

Less expensive than other options

When compared to other debt products such as business loans, the interest charged by the lender for an asset refinancing agreement could be lower in certain circumstances.

Disadvantages of asset refinance

Like all financial products, asset refinance does come with some potential disadvantages for businesses looking to use this product.

Can be expensive

Asset refinancing will be more expensive than using your own cash reserves due to needing to pay interest to the lender and any service fees for arranging the product.

Your asset is at risk

If for whatever reason, you are unable to keep up with your repayments then the asset you put up as security can be removed by the lender, causing disruption to your business.

You must keep the asset in good order

Whilst you are repaying the lender it is your responsibility to keep the asset in good order including maintenance, repairs, and arranging suitable insurance.

Alternatives to asset refinancing

Depending on what you’re looking to use the cash injection for, there are a number of other financial products that could be suitable for your needs.

If you plan to use the funds unlocked by asset refinancing to pay for a capital expenditure it might also be worth exploring:

• Business loans
• Bridging loans
• Mezzanine finance

If you’re looking to finance a commercial property transaction or improvements to a commercial vehicle fleet, read our handy guides.

Alternatively, if you’re looking to unlock working capital or boost cash flow then it might be worth considering:

• Working capital revolvers
• Invoice finance
• Merchant cash advance
• Overdrafts
• Purchase order financing

Learn more with our guide to working capital finance options.