Companies often need additional working capital to fuel growth or meet their financial obligations in the dynamic business landscape. One powerful tool available to businesses in such situations is asset refinancing. This financial strategy allows enterprises to unlock the value of their existing assets and convert them into much-needed cash.
- What Is Asset Refinancing
- Advantages
- Disadvantages
- How Asset Refinancing Works
- Types of Assets You Can Refinance
- Potential Tax Benefits of Asset Refinancing
What Is Asset Refinancing
Asset refinancing is a financial solution that enables businesses to raise capital by leveraging the value of their existing assets.
This form of funding allows companies to use their assets, such as machinery, equipment, vehicles, or even property, as collateral to secure a loan or other financing options.
The process typically involves a financial institution, such as a bank or specialised lender, providing funds to the business for a security interest in the assets. As a result, the company retains operational control and use of the assets while using the released capital to address various financial needs, such as working capital requirements, debt consolidation, expansion initiatives, or even to bridge temporary cash flow gaps.
✅ Advantages
- Access to Immediate Capital: Asset refinancing allows your business to access capital quickly without waiting for traditional loan approvals or the time-consuming process of selling assets.
- Retention of Ownership and Use: Unlike selling assets outright, refinancing enables your business to retain ownership and use its assets while leveraging its value to raise capital.
- Increased Cash Flow: By unlocking the value of assets, your business can improve its cash flow position, providing the necessary funds to meet immediate financial obligations or invest in growth opportunities.
- Flexibility and Customisation: You can tailor asset refinancing solutions to the unique needs of your business. Lenders offer flexibility regarding loan tenure, repayment schedules, and loan amount, allowing you to choose the most suitable option.
- Potential Tax Benefits: Asset refinancing may offer tax advantages depending on the jurisdiction and specific circumstances. It’s essential to consult with financial professionals to determine the potential tax benefits applicable to your business.
❌ Disadvantages
- Cost of Financing: Asset refinancing typically involves interest charges, fees, and other costs associated with securing the loan. You should carefully evaluate the overall cost of financing to ensure it aligns with your business’s financial goals.
- Potential Loss of Equity: By using assets as collateral, you risk losing equity in the event of default. Before refinancing, assessing the potential impact on ownership and equity positions is essential.
- Asset Valuation Risks: Asset valuations can be subjective, and fluctuations in market conditions or changes in asset value may impact the amount of capital your business can raise. Working with experienced professionals is crucial to ensure accurate and fair valuations.
- Impact on Credit Rating: Asset refinancing may affect your business’s credit rating if the lender reports the transaction to credit agencies.
How Asset Refinancing Works
Asset refinancing works by following a structured process that enables businesses to unlock the value of their assets without having to sell them outright. Here are the key steps involved:
- Assessment of Assets: The first step is to assess the value and quality of the assets your business intends to refinance. This evaluation helps determine how much capital you can raise against them.
- Agreement and Valuation: Once you have identified the assets, you can agree with the lender on the terms and conditions of the refinancing. An independent evaluator will determine the current market value of the assets.
- Loan or Funding Arrangement: Based on the valuation, the lender offers a loan or funding arrangement, typically a percentage of the asset’s value. You and the lender agree on repayment terms, including interest rates, tenure, and additional fees.
- Security Interest and Documentation: The lender takes a security interest in the assets to secure the loan. Legal documentation, such as a debenture or charge, is prepared to establish the lender’s rights over the assets.
- Release of Funds: The lender disburses the agreed-upon funds to your business once they have finalised the documentation. Your business can use these funds for various purposes, providing much-needed liquidity.
- Repayment and Continued Use: Your business repays the loan through regular instalments per the agreed terms. During the repayment period, the company retains possession and use of the assets.
Example
To illustrate how asset refinancing works, let’s consider the case of ABC Manufacturing, a UK-based company specialising in industrial machinery. ABC Manufacturing owns a fleet of machinery and equipment they use in their manufacturing operations. As a result, they need additional working capital to invest in new technology and expand their production capacity.
After assessing its assets and entering into an agreement with a financial institution, ABC Manufacturing refinances a portion of its machinery fleet. Based on an independent valuation, they secure a loan equivalent to 70% of the machinery’s market value. The released funds give ABC Manufacturing the capital to invest in new machinery and upgrade its infrastructure.
Over the agreed loan tenure, ABC Manufacturing makes regular repayments, including interest, to the lender. They continue to use the refinanced machinery to fulfil their operational requirements without interruption.
Find out how much you could finance using our free online asset finance calculator →
Types of Assets You Can Refinance
You can typically apply asset refinancing to a wide range of tangible assets with significant value. While the specific eligibility criteria may vary among lenders, here are some common types of assets that you can consider for refinancing:
Aircraft and Marine Assets:
Aviation or maritime industry businesses may explore refinancing options for aircraft, ships, or vessels. This can provide access to capital for maintenance, upgrades, or expansion of their fleets.
Agricultural Assets:
Agricultural businesses may be able to refinance assets such as farm machinery, equipment, livestock, or agricultural land. This can provide working capital to support ongoing operations or expansion.
Healthcare Equipment:
Medical facilities, clinics, or hospitals can refinance medical equipment, diagnostic tools, or specialised machinery. This can help healthcare providers access funds for equipment upgrades or facility improvements.
IT Infrastructure:
Technology assets, including servers, data centres, hardware, and software systems, can be refinanced. This is particularly useful for businesses in the IT industry or those heavily reliant on technology infrastructure.
Machinery and Equipment:
Industrial machinery, manufacturing equipment, construction machinery, and other specialised equipment can be eligible for refinancing. These assets are often vital to the operations of businesses in sectors such as manufacturing, construction, and logistics.
Real Estate:
Commercial properties, such as office buildings, warehouses, retail spaces, or land, can be refinanced. Real estate refinancing can give businesses access to capital by leveraging the value of their properties.
Renewable Energy Infrastructure:
Assets related to renewable energy, such as solar panels, wind turbines, or biomass facilities, can be considered for refinancing. This is relevant for businesses operating in the renewable energy sector.
Vehicles and Fleet:
Commercial vehicles, including trucks, vans, buses, or an entire fleet, can be refinanced. This is particularly relevant for transportation, logistics, or delivery services businesses.
It’s important to note that asset refinancing eligibility will depend on factors such as the asset’s value, condition, and market demand. Lenders will also consider the stability and profitability of the business when assessing the suitability of assets for refinancing.
Potential Tax Benefits of Asset Refinancing
Potential tax benefits associated with asset refinancing can vary depending on the specific circumstances of the business. While it is essential to consult with tax professionals to understand the implications for your particular situation fully, here are some potential tax benefits that may arise from asset refinancing:
Tax Deductibility of Interest:
The interest paid on loans taken for business purposes is generally tax-deductible. This means that the interest expense incurred due to asset refinancing can be deducted from your business’s taxable income, potentially reducing the overall tax liability.
Capital Allowances:
Some countries, including the United Kingdom, provide tax incentives through capital allowances for qualifying assets. When you refinance assets, your business may be eligible to claim capital allowances on the original cost of those assets. This can result in a reduction in taxable profits and lower tax payments.
Offsetting against Capital Gains:
If your business decides to sell an asset that has been refinanced, you can offset any outstanding debt associated with the refinancing against the capital gains realised from the sale. This offset can reduce the taxable capital gains and lower tax liability.
Timing of Tax Payments:
Asset refinancing can give your business access to immediate capital, allowing them to meet their financial obligations and make timely tax payments. This can help avoid penalties or interest charges associated with late tax payments.
Tax Planning Opportunities:
Asset refinancing can offer you opportunities for tax planning. By strategically refinancing assets, you can align your business financing and tax obligations to maximise deductions and minimise the overall tax burden.
It is important to note that tax laws and regulations can be complex and subject to change. Therefore, consulting with qualified tax professionals or advisors who can provide specific guidance based on your business’s circumstances and the tax laws is advisable. In addition, they can help you determine the potential tax benefits and ensure compliance with all applicable tax regulations.
Conclusion
Asset refinancing offers businesses in the United Kingdom a practical and flexible solution to raise capital by leveraging the value of their existing assets. As a result, companies can address financial challenges, pursue growth opportunities, and enhance their cash flow by retaining ownership and operational control while accessing immediate liquidity.
However, it’s essential to consider the advantages and disadvantages of asset refinancing before deciding. Every business is unique, and understanding the potential risks and rewards is crucial in determining whether asset refinancing aligns with your company’s specific financial goals and circumstances.
While asset refinancing can provide quick access to capital, evaluating the overall cost of financing, the potential impact on equity and credit rating and the accuracy of asset valuations is essential. Working closely with experienced financial professionals can help businesses navigate these considerations and make informed decisions.
If you are interested in taking advantage of the benefits of asset refinancing, contact us or even use our free online asset finance calculator to find out how much you could borrow.
info@dorsiafinance.co.uk | 01522 420 420