The term ‘asset finance’ includes arrangements such as hire purchase and asset leasing, which are methods by which your business can acquire new assets.
In this article, however, we will look at asset refinance and sale and leaseback, which are ways in which you can raise funds using assets you already own.
Asset refinance – how it works
With asset refinance, you identify an asset that your business owns and that the lender is happy to accept as security for a loan.
The lender then lends you a sum of money, and you repay this sum, plus interest, in regular installments. You might be able to borrow as much as 100% of the asset’s value. At the start of the agreement, you have to surrender ownership of the asset to the lender, but provided you make all of the required repayments, you regain ownership at the end of the term.
Sale and leaseback – how it works
As with asset re-finance, sale and leaseback is a method of raising funds using an asset your business already owns. The major difference though is that sale and leaseback literally do involve the ‘sale’ of the asset – the finance provider purchases it from you, and you won’t own it again.
However, it can provide the best of both worlds for businesses, because you can spend the sale proceeds, whilst also continuing to have full and exclusive use of the asset in the longer term. Once the asset has been sold, you would lease it back from the provider, and make regular repayments for the right to continue to use it.
What are suitable assets for asset finance?
This isn’t an exhaustive list, but these assets are typically used as security in asset re-finance agreements:
- Machinery
- IT equipment
- Construction equipment
- Catering equipment
- Agricultural equipment
- Company vehicles, aircraft, boats and other modes of transport
- Assets that might be sold via sale and leaseback arrangements include:
- Real estate
- Machinery
- Hardware
- Software
- Patents and licences
- Various items of stock
- Vehicles, aircraft, boats and other modes of transport
What can I use the money for?
In short, you can use the funds you raise via asset re-finance or sale and leaseback for any business purpose. However, asset re-finance and sale and leaseback are frequently used for:
- Boosting cash flow and working capital
- Paying unexpected bills
- Funding development of new products and services
- Purchasing other equipment, stock or other assets
- Meeting the costs of a marketing campaign
- Funding the costs of a recruitment drive
- Acquiring other businesses
Is this right for me?
Advantages of asset re-finance include:
- Even during the period when you don’t own the asset, you still have full and exclusive use of it
- It can be easier to obtain asset re-finance, compared to a traditional business loan. For example, it’s likely you can still obtain asset re-finance if you have a poor credit record
- The interest rate is likely to be fixed, meaning that you know exactly how much the regular repayments will be, so you can easily budget for them
Disadvantages of asset re-finance include:
- You still have responsibility for insuring and maintaining the asset during the period when ownership reverts to the lender
Advantages of sale and leaseback include:
- By selling the asset, you don’t need to worry about its value falling in the future via depreciation
- You retain full and exclusive use of the asset for an extended period, which might be as long as 20-30 years. If you need the asset for longer than this, it might even be possible to negotiate an extension
- All rental payments are tax-deductible
- It’s not a credit agreement, so you won’t accumulate any debt, and it can be a useful way of raising funds for businesses that might struggle to obtain traditional loans
- Any borrowing on the asset will be removed from your balance sheet
Disadvantages of sale and leaseback include:
- As you have permanently sold the asset, you won’t be able to benefit from any increases in its value
- By selling one asset, the total value of your business assets will reduce, which will affect the valuation of your business
If you’re looking to benefit from financing your business assets, contact Funding Bay.
Check out our Asset Finance Calculator.
