Deciding whether to invest in new assets or development can be a difficult task, particularly in the current financial climate with so many businesses experiencing cash flow issues.
What many do not realise, however, is that they may be able to access a significant cash injection by refinancing assets that they already have.
Asset refinancing means that a lender will look at the equity or share you have in assets, assess its current and likely future value, and provide you with a loan based on that evaluation. The loan can then be used for growth or to improve financial stability.
You then pay that loan back via an affordable, fixed-rate repayment arrangement.
The loan amount will always be limited by the value of the asset(s) but if there is enough equity in an high-value item, you could unlock a significant amount of cash.
A big advantage of refinancing is that you don’t need to own the asset(s) outright. This is because lenders will base their loan offer on the equity you currently hold. For example, if you have purchased assets using a hire purchase agreement and you still owe money to the provider on it, you may still be able to borrow against the share that you already own.
Here are some examples of how asset refinancing might work.
Jeremy owns an agricultural business with over £100,000 worth of plant machinery and farming vehicles. He purchased the machinery and vehicles using a hire purchase agreement.
Scenario A
All payments have been made on the hire purchase agreement, so the business owns the assets outright. A lender could loan Jeremy 80% of the total value of the assets which, in this case, is £80,000.
Scenario B
There is just £20,000 left to pay on the hire purchase agreement. This means Jeremy has £80,000 of equity in the assets and owns four-fifths of the equipment – the hire purchase provider owns the remaining fifth. A lender could loan Jeremy 80% of the value of Jeremy’s share which, in this case, would be £64,000.
Note: Lenders usually recommend waiting until at least 50% of the way through an existing agreement before looking at refinance, as this is when you should have a suitable level of equity in the asset. We can look also at refinancing assets under existing agreements, where the existing finance will be settled as part of the refinance.
Refinancing is best suited to assets that are likely to retain their value and be useable for many years to come e.g., plant machinery, manufacturing machinery, or vehicles (including classic, modern, and commercial vehicles).
The age of the asset if less relevant as lenders assess likely future value. Some types of machinery or vehicles will retain or increase in value for decades.
Each lender has their own policy but usually loans range anywhere from 80-90% of the value of the asset, but this can vary depending on the type of asset and your business’ financial circumstances.
The repayment terms can be completely flexible and tailored to suit your needs customer, but they will also be influenced by the type of asset(s) being refinanced.
Last Updated: March 2024. Version: BS.202309.01.FS01
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