Asset refinance allows a business to raise funds against assets that it already owns. A finance provider purchases the asset from the business and lends a sum of money to the business in return. This type of funding is available for a wide range of business assets, including vehicles, property, tools, IT equipment, and other machinery. Therefore, asset refinancing is sometimes called ‘sale and leaseback or ‘capital release’.
The business makes fixed monthly repayments over the term of the asset refinance agreement to repay the sum raised, plus interest. A typical repayment term for this type of funding is around five years, although sometimes terms run for up to 10 years. When all required repayments have been made, the business becomes the legal owner of the asset once again at the end of the term.
It is likely that a business can borrow a relatively high proportion of the asset’s value, and in some circumstances, it might be able to release 100% of the asset’s value. Depending on the type of asset involved, this means that the amount a business can borrow could be anything from a few thousand to several million pounds.
The interest rate for asset refinancing varies, but a typical interest rate might be between 2% and 7%. The rate charged is affected by factors such as the asset’s condition, age, and whether it is owned wholly or partially by the business.
Before approving an asset refinance application, a lender is likely to ask for information such as:
- How long the business has owned the asset
- The age of the asset
- What make and model the asset is
- The lender assesses the extent to which the asset has been used over its lifetime
- Documentary proof that the business owns the asset.
The lender might also visit the business to inspect the asset before approving the application.
Benefits of this kind of arrangement
Many businesses have benefited from entering into this form of arrangement.
Potential advantages of asset refinance are:
- It can be a simple way of generating additional working capital
- Lenders usually approve asset refinance applications within a matter of days.
- This form of finance is available to businesses of all types and sizes, including sole traders.
Businesses are unlikely to:
- Need to pay a large deposit
- Retain full and exclusive use of the asset throughout the term of the asset refinance agreement
- To have the lender perform a credit check on them during the application process.
The funds raised are for any business purpose:
- Including improving cash flow, purchasing other equipment
- Funding growth and expansion, paying for repairs and refurbishments
- Paying unexpected bills.
It is a fixed interest rate, so businesses know exactly what they will be repaying every month for the duration of the agreement.
However, before committing to an asset refinance arrangement, businesses should take note of the following disadvantages: if they fail to maintain the required repayments, the lender is likely to repossess the asset, and all the repayments required during the term add up to a significant sum. Businesses remain responsible for insuring and maintaining the asset during the repayment term, even though ownership has temporarily reverted to the lender.
Get in touch with the team at Funding Bay to see how your team may benefit from this facility!
Check out our Asset Finance Calculator.
