The interest rate you are likely to be offered on an asset refinance arrangement might be anywhere between 2% and 7%. The interest rate is likely to be fixed throughout the term.
Factors that could determine whether your rate is towards the lower or higher end of this range include:
- The age of the asset
- Whether the asset is in good condition
- Whether your business owns the asset outright, or whether you instead own it partially as a result of an existing finance arrangement
There will undoubtedly be some fees to pay, and these can be added to the loan instead of being paid upfront. For example, there could be a documentation fee of somewhere around the greater of £250 and 0.5% of the loan amount.
The term of an asset finance agreement might be anything between one and seven years, and you will make regular monthly repayments throughout this period.
Asset re-finance might potentially be available for any amount between a few thousand and a few million pounds.
If you borrow £175,000 over a term of five years, at an interest rate of 3.5%, your monthly repayment might be £3,464.09. The total repayable is £207,845, of which £32,845 comprises the interest payments.
How does asset re-finance work?
Asset refinance allows you to raise money using assets that your business already owns. It is available on almost any type of business asset, including property, vehicles, machinery, and IT equipment.
The finance provider lends you a proportion of the asset’s value, potentially as much as 100% of its value, although receiving 70% to 85% of the value might be more common. In return, ownership of the asset passes to the lender for the duration of the asset re-finance arrangement.
You then make monthly repayments, comprising the amount borrowed plus interest, until all amounts due have been repaid. You then regain ownership of the asset.
Most asset re-finance arrangements involve lending against assets that the business owns outright, i.e., where there is no existing finance agreement in place. However, it might also be possible to set up an asset re-finance arrangement where you borrow against the existing equity within an asset, and where the lender pays off the outstanding sum under your previous finance arrangement.
Advantages of asset re-finance
- The interest rate is likely to be fixed throughout the term, meaning that there will be no unexpected and sudden rises in your monthly repayment
- The application and approval process is usually very swift, and you could have the loan funds in your bank account within a few days of being approved
- The funds raised can be used for any business purpose, including addressing short-term cash flow difficulties, paying emergency bills, purchasing stock, funding the costs of recruitment or expansion or meeting the costs of developing new products and services
- You should still be able to access asset re-finance if you have an impaired credit history. This is just one of the reasons why asset re-finance is often easier to obtain than a traditional bank loan
- You retain full, unrestricted, and exclusive use of the asset throughout the repayment term, even though you will have been forced to surrender ownership of the asset
Disadvantages of asset re-finance
- You need to surrender ownership of the asset to the lender for the entire term of the agreement
- Many asset re-finance lenders are known for not being especially generous in their valuations of assets, thus restricting the amount you can borrow
- Especially with a longer term, the total repayments you need to make can add up to a significant sum
- You are still responsible for the costs of insuring, maintaining, and repairing the asset throughout the term, even though you won’t be its legal owner during this period
- If you fail to make the required repayments, the lender can repossess the asset
Get in touch with the team at Funding Bay if you want to know more about the asset re-finance arrangement.
