Asset Refinance

It’s a familiar situation in business. You find yourself with a solid base of assets and a favourable balance sheet… but your cash flow doesn’t look anywhere near as healthy!

Even the most successful businesses suffer from cash flow issues, and they need reliable means of tackling them before problems escalate.

For many firms, asset refinance is a valuable way of unlocking capital that’s tied up in assets. This capital can be used to boost liquidity, offer funding for investment, pay for marketing campaigns or recruitment and generally offer breathing space – without needing to dispose of the asset itself.

In this article, the team at ABC Finance have shared the top things our clients want to know about business asset refinance.

What is asset refinancing?

Asset refinancing is the process of using a business asset as security to raise finance.

It is also called asset refinance, asset-backed refinance and sale-and-leaseback because the business sometimes sells the asset and then leases it back to unlock vital cash.

Why do businesses choose asset refinance?

Many businesses have capital heavily tied up in the assets they need to run their operation. These can be fleet vehicles, office accommodation, manufacturing plant, specialist equipment, or machinery, for example.

While these assets are essential, their ownership represents heavy capital investment, and the business’s funds are tied up in that asset. Asset finance lets the business convert some of that capital into cash, whilst still keeping the asset in the business and continuing to use it. Essentially, it’s a form of business borrowing against a secured asset.

Is asset refinance the same as asset finance?

Asset refinance is different from asset finance. Asset finance exists to fund the purchase of an asset. With asset refinance, rather than buying new equipment, vehicles, machinery or property, the business is finding a better way to leverage what it already owns.

What types of assets can a business refinance?

Businesses can refinance assets such as:

• Business vehicles (fleet cars, trucks, vans, etc.)
• Machinery and plant
• Specialist equipment – anything from big-ticket office equipment to specialist medical diagnostic technology.)
• Real estate or commercial property.
• In some instances, stock can also be refinanced, although this is less common and carries risks.

How does asset refinancing work?

This is a high-level view of the process that a business takes to secure asset refinancing.

Choose the assets and have them valued

The business will identify assets that are ideal for refinancing. They usually need to be owned outright, or have “sufficient” equity (requirements vary by lender). The assets must also be in good condition, be relatively liquid or marketable and have a clear maintenance history. Essentially, they must have a clear and objective market value. This value will be proven through a formal valuation to appraise market value, and the lender will have a process for this.

ABC Finance tip:

The assets should not also have prior security held against them, but if they do, it can sometimes be possible to refinance this onto better terms. ABC Finance can help with this specialist finance.

Determine what you can borrow

Lenders use a loan-to-value calculation (also known as a release percentage) to decide what percentage they will lend against the asset’s appraised value. This depends on its condition, risk, asset class, remaining useful life and marketability.

ABC Finance tip:

If the asset already has finance on it (perhaps a hire purchase arrangement), the lender may first repay this and wrap those costs into a new deal, or lease the asset back. This is specialist lending territory, and a broker like ABC Finance can help you to navigate the complexities and find the best possible deal.

The lender structures the deal

There are various asset refinance loan structures available, depending on circumstances. For example:

• Debt-based asset refinance means the asset will remain yours legally, but you’ll have a loan secured on it.
• Sale-and-leaseback is a leasing arrangement. You sell the asset to the finance provider and then lease it back from them for an agreed fee.
• Hybrid lease – you can retain partial ownership or beneficial use.
• Refinance for existing hire purchase arrangements – reworked or consolidated into a new finance detail.

Contracts are prepared and signed

The lender will produce a contract with agreed interest rates, payments, schedules, insurance, maintenance needs, default information, etc. Elements of the financial obligations can be negotiated beforehand through a specialist finance broker to get the best possible deal.

Once the business and lender sign the contract, the funds are released or used to settle existing obligations on the asset. The business continues to use the asset while this process is happening, and makes the agreed payments.

Exit processes

At the end of the asset refinancing deal, different steps are possible depending on the contract in place.

The business may gain full ownership of the asset, enter into a new finance deal, rollover the existing finance or pay a final purchase fee.

7 reasons to consider asset refinancing

Here are some of the main reasons to look at asset refinance:

1. Unlock liquidity by turning assets into cash, ready for any business purpose.
2. Keep using the asset within your business
3. Potentially better terms than unsecured loans, with more favourable interest rates (because the finance is secured).
4. An easy way to refinance or consolidate expensive or multiple debts into one, manageable and potentially more affordable structure with smoother cash flow profiles.
5. Possible tax and accounting benefits, as payments may be tax-deductible.
6. Flexible and fast, with asset refinancing usually available faster than traditional new business loans. This is because secured finance is less risky for the lender.
7. Frees up or maintains other lines of credit. 

Pitfalls and risks to keep in mind

All forms of finance have some downsides. Watch out for these things and carefully factor them into your decisions.

• Possible negative effects on the balance sheet.
• Loss of ownership and control in sale-and-leaseback arrangements, or if the business defaults on the loan and loses the assistance.
• A lower residual value than expected and precision risks, reducing possibilities for future finance.
• Expensive fees, interest and costs (tip: ABC Finance can help you access the best possible deals from trusted lenders!)
• Possible asset usage restrictions plus obligations to maintain insurance and maintenance. Major modifications to the asset might also be denied under the contract, limiting business flexibility.
• If payments are missed, the lender might repossess the asset.