Asset refinancing, also known as asset-based lending or asset-backed financing, is a financial arrangement where lenders evaluate the equity or ownership you have in an asset and provide you with a loan based on that assessment.
In this scenario, if you have acquired equipment through a hire purchase agreement and have partially paid off the amount owed to the hire purchase provider, you can leverage the equity you have built in the asset to secure additional financing.
The new lender will typically pay off the original lender (in this case, the hire purchase company) and provide you with a lump sum loan based on the equity you possess in the asset.
By refinancing your asset, you can unlock the value tied up in it and obtain immediate access to funds. This can be beneficial if you require working capital, wish to invest in new opportunities, or need funds for other purposes. The asset itself serves as collateral for the loan, reducing the lender’s risk.
It’s important to note that the terms and conditions of asset refinancing can vary depending on the lender and the specific asset involved. The loan amount you receive will typically be a percentage of the asset’s appraised value or the equity you hold in it. Interest rates, repayment terms, and any associated fees will also be determined by the lender.
What is asset refinance?
Asset refinance, also known as asset-based lending or asset-backed financing, is a financial strategy that allows individuals or businesses to unlock the value of their assets to obtain funds. In asset refinance, the equity or ownership in an asset, such as equipment, machinery, or property, is used as collateral to secure a loan.
Lenders assess the value of the asset and provide a loan based on a percentage of that value. This type of financing can be particularly beneficial for businesses looking to access immediate capital while still retaining ownership and use of their assets. Asset refinance offers a flexible funding solution, enabling businesses to address working capital needs, pay off debts, invest in growth opportunities, or manage financial challenges.
It provides a way to leverage existing assets and turn them into usable funds for various purposes.
How does asset refinance work?
Let’s use a little illustration to demonstrate how asset refinancing functions in real life. In the example you provided, Joe’s construction firm owns a machine worth £10,000, with £1,000 remaining to be paid under the hire purchase agreement. This means that Joe’s company has £9,000 of equity in the machine, representing 90% ownership, while the hire purchase provider holds the remaining 10%.
If Joe decides to pursue asset refinancing, he could potentially access funds up to approximately £6,000. This amount is typically calculated as a percentage of the overall value of the item. In this case, the refinance lender would pay the hire purchase firm the outstanding £1,000, taking charge over the asset. The lender would then provide Joe’s company with a loan of £6,000 based on the value of the machine.
It’s worth noting that the specific percentage of the asset’s value that can be refinanced may vary depending on factors such as the type of asset, its condition, market demand, and the policies of the refinance lender. The lender will conduct an assessment to determine the value and condition of the asset before finalizing the loan amount.
Keep in mind that the figures provided in this example are for illustrative purposes only and may not reflect the actual terms and conditions offered by lenders in real-world scenarios. It’s important to consult with a financial professional or approach lenders directly to get accurate information and tailored advice regarding asset refinancing options.
Equity is key to refinancing
The same logic can be applied to any asset that can serve as collateral for refinancing. In the scenario where Joe owns the asset outright, he would indeed have the potential to raise more money against it compared to the situation where he has partial ownership.
Using your example of Joe owning a commercial property worth £500,000, with £200,000 remaining on a commercial mortgage, he effectively has £300,000 of equity in the property. In this case, Joe may be able to refinance and obtain a loan based on the value of £300,000. The refinance lender would pay off the existing mortgage, take a charge over the property, and provide Joe with a loan based on the equity he holds.
The amount that can be raised through asset refinancing will depend on factors such as the type and value of the asset, its marketability, and the policies of the refinance lender. It’s important to note that the lender will typically conduct a valuation of the asset to determine its current worth before finalizing the loan amount.
Asset refinancing can be a flexible financing option for individuals or businesses looking to access funds while leveraging the equity in their assets. However, it’s crucial to carefully consider the terms and conditions of the refinancing agreement, including interest rates, repayment terms, and any associated fees, to ensure it aligns with your financial needs and objectives. Consulting with financial professionals or lenders directly can provide more tailored information and guidance based on your specific situation.
Frequently asked questions
Asset refinance, also known as asset-based lending, is a financial arrangement where businesses leverage the equity in their assets to secure loans. It provides immediate funds by using the asset as collateral. This option is beneficial for distressed companies seeking to address financial challenges, as it unlocks asset value, generates cash flow, and allows for operational expenses, debt repayment, or growth investments. Asset refinance enhances liquidity and helps businesses navigate through tough times.
An example of asset refinance is when a business owns a commercial property valued at £500,000 with a remaining mortgage balance of £200,000. By leveraging the equity in the property, the business can refinance it and obtain a loan based on the £300,000 of equity. This allows the business to access immediate funds for various purposes, such as working capital or expansion, while retaining ownership and use of the property. Asset refinance offers a flexible financing solution for businesses looking to unlock the value in their assets and meet their financial needs. What is asset refinance?
What is an example of an asset refinance?
Conclusion
Asset refinancing can offer significant benefits to a financially distressed company. In such situations, traditional sources of financing may be limited or unavailable due to the company’s weakened financial position. Asset refinancing provides an opportunity to unlock the value tied up in existing assets and generate immediate cash flow.
By leveraging the equity in the assets, the company can secure loans or credit lines, providing much-needed working capital to address operational expenses, pay off debts, or invest in growth opportunities. This infusion of funds can help stabilize the company’s financial situation, enhance liquidity, and enable it to navigate through challenging times.
Moreover, asset refinancing allows the company to retain ownership and use of the assets while still accessing the necessary capital, thereby offering a valuable lifeline to distressed businesses seeking to recover and regain financial stability
The Business Insolvency Helpline team can assist you if you want more information about asset refinancing and how it might benefit your company. We will make sure you are aware of all your possibilities because we are experts in business finance. To discuss your needs and schedule a free initial consultation, call a member of the team or complete an online enquiry.
Lee Jones is a seasoned expert in the field of business finance with over two decades of experience. With a keen understanding of financial markets and a passion for helping businesses thrive, Lee has become a trusted advisor to countless companies across the United Kingdom.