What is Asset Refinance?
Asset refinance is essentially a sale-and-leaseback process: you sell your asset to a lender for cash, and they lease it back to you with the cost of monthly payments.
Understanding the fine nuances of business finance can be complicated, and asset refinance comes with its own set of quirks.
At its most basic, it is a way of raising capital equal to the value of your assets, but the specifics of it make it a very powerful tool for business accounting.
From the outside, it is very similar to a secured business loan, leveraged against an asset, but also shares functionally with the process of a finance lease.
How Does Asset Refinance Work?
Unlike a secured loan, where the asset remains yours and can be repossessed if loan repayments are not made, asset refinance sells the asset to the lender who then leases it back to you under terms similar to a finance lease or new hire purchase arrangement.
One of the advantages of asset refinance is that you do not need to own the asset in full in order to take advantage of the product – it’s possible to leverage asset finance against assets that you are still paying for under current hire purchase agreements, for example.
In these instances, the finance company would pay off the remaining sum of the hire purchase agreement and lease the asset to you in full, providing you with capital of up to 70% of the asset value.
For an example:
Hilltop Farm owns a tractor valued at £100,000. It has been paying for it through a hire purchase agreement and there is still £15,000 outstanding. Hilltop Farm’s equity in the tractor is valued at £85,000. It seeks to use asset refinance on the tractor to inject capital into the business.
The finance company purchase the tractor, paying off the remaining £15,000 and leasing it to Hilltop Farm on three-year terms. They release £70,000 in cash to Hilltop Farm, and a repayment agreement of £2,650 per month.
The Difference Between Asset Refinance and Assed-Based Finance
The similarities between asset refinance and asset-based finance, or a secured loan, are great.
Indeed, many finance companies do not make a particular distinction between the two products.
In both, you are able to secure funds against the value of your assets; in both, you can use multiple assets to increase the size of the loan; and both will result in similar interest rates and fees.
The primary difference however, comes when trying to use an asset to secure the loan amount when you do not yet own the asset – this is entirely the remit of a secured loan.
The clearest example comes from a commercial mortgage, a specific type of secured (or asset-based) loan. When purchasing property, you obtain the loan for the express purpose of that purchase, leveraged entirely against that property. It is a loan provided to buy the asset itself and thus is not asset refinance.
On the other side of the coin, most asset-based loans will not allow you to leverage an asset that you do not own in its entirety, whereas asset refinance does provide for this situation.