A number of businesses have made use of asset finance arrangements, but is this option right for you?
You’re temporarily giving up something you already own
Asset refinance involves borrowing using one of your existing assets as security and then making regular repayments over a specified term. Although you will become the legal owner of the asset once again when all repayments have been made, you surrender ownership of the asset to the finance provider for the duration of the repayment term. Furthermore, you still have the responsibility for ensuring and maintaining the asset during the period when ownership reverts to the lender.
It’s a secured finance arrangement
If you fail to maintain repayments, the provider can seize the asset, preventing you from using it during the repayment term and stopping you from becoming the legal owner of it in the future.
Repayment commitments can be significant
With asset finance, you could be making repayments over a term of around five years or longer. Once you’ve added up all the monthly repayments, it could come to a significant amount. Paying this much simply to continue using something you already own can be difficult to accept.
How does asset finance work?
Asset finance has been likened to remortgaging a property. In one sense, the analogy is a good one, as you are raising funds with one of your existing assets used as security for the loan. However, one of the crucial differences is that, while you remain the owner of the property during the repayment term of a standard mortgage, with asset refinance the provider becomes the legal owner during the repayment term. You need to wait until you have made all the repayments before assuming ownership of the asset once again.
The amount lent to you will be a portion of the asset’s value, and you will then repay this amount, plus interest, in installments. A typical interest rate might be anything between 6% and 9% per year. During the repayment period, you can continue to use the asset in the usual way, but even though you’ve given up ownership, you still have responsibility for ensuring and maintaining the asset.
The amount you can borrow under this type of arrangement can vary significantly. It all depends on the value of the asset and the size of your business, but it might be possible, in some circumstances, to borrow anything between £5,000 and £50 million.
Potential advantages of asset re-finance include:
- The funds you raise in this way can be used for almost any business purpose, including boosting cash flow, purchasing stock or equipment, funding expansion, or taking on new staff
- The funds raised can deliver an immediate boost to your cash flow
- Interest rates are likely to be fixed throughout the term, meaning your payments won’t increase and so you have the peace of mind that comes with knowing exactly what you will need to repay each month
- It might still be possible to arrange asset re-finance even if you don’t own the asset outright
- You can usually obtain asset re-finance funding even if you have a poor credit history
Get in touch with the team at Funding Bay to find out if asset finance might be the right fit for your business!
Check out our Asset Finance Calculator.
