A popular way of improving company cash flow, by releasing funds — that’s tied up in existing assets.
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What is asset refinance?
Asset refinance allows companies to sell equipment or machinery to an asset refinancing company. Businesses subsequently lease back that same asset — making regular rental payments. In essence, this allows companies to better manage cash flow and help with daily operations or investments in business expansion.
Asset refinance is a form of asset finance.
Asset refinance — considerations
Asset refinance can be thought of as a way of making existing assets work harder for you. Using asset refinance, you can inject vital working capital into your business — as and when needed.
All companies, big or small, can enjoy the benefits of introducing this working capital — such as having the cash for business growth or setting up new projects.
Businesses often find it difficult to raise finance — due to ever tightening bank lending criteria. Asset refinance is a way around this problem, as your assets act as collateral for a loan. Accordingly, asset refinance can be also seen as a form of secured loan — with reduced risks to the lender.
This lowered risk gives financers more confidence in lending to a business — with credit history and personal guarantees being less important.
You can use asset refinance to borrow against any equity you have in an asset you do not fully own. However, refinancing is usually reserved for assets that a business owns in full — that is not subject to existing financing arrangements.
Almost anything can be considered as an asset — as long as it is valuable. This way of funding is ideal for companies that are asset rich but cash poor.
How does asset refinance work?
You approach an asset refinance provider with the idea of selling an asset to them. Typically, your business would need to provide the lender with detailed information on the asset being refinanced (proof of ownership, current usage etc.).
The financing company would then proceed to value the asset and based on the valuation — they’ll make you an offer. Should you agree, the lender will purchase the asset and lend it back to you.
Repayments are then made based on your revenue stream and at the end of the refinance term, the asset is returned to you. This is often known as sale and hire purchase back (leaseback). Alternatively, you may agree to just lease the asset until the end of its useful life — a capital lease.
Benefits of asset refinance
- Efficiency — continuous use of the asset
- Spread the cost further — refinance an existing agreement you have with another provider
- Choice — use the money for any purpose
- Appropriate source of funding — even with poor credit ratings
- Application and decision making process is relatively quick
Limitations of asset refinance
- You’ll pay back more than the asset is valued at
- Failure to make repayments can result in asset repossession
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