Coronavirus (COVID-19)

If you are concerned about your business being impacted financially due to coronavirus, we are here to support you.
Guidance and support

Please note, we are not an Accredited Lender for The Coronavirus Business Interruption Loan Scheme (CBILS). Visit The British Bank for more information on the scheme.

Asset Refinance Explained

Find out what Asset Refinancing involves and how this secured lending option could free up cash flow to help your business grow.
Asset Refinance Explained

Updated on 24/06/2020

Asset finance is a type of loan that involves using an asset as insurance when taking out a new loan agreement. There are lots of different options for how this agreement could take place, but one of the most interesting is asset refinancing - in which a pre-owned asset is sold to a lender, then leased back to the borrower.

In this article we’re going to highlight the difference between asset finance and refinance, before diving into exactly what the latter involves.

What’s the difference between asset finance and refinance?

Link

Asset refinancing is all about unlocking money from the property you already own. Instead of promising an asset as insurance to take out a new loan agreement, with asset refinancing you sell the ownership of your existing asset back to a lender and form an agreement in which they lease the asset back to you over a fixed period of time.

Let’s look at an example of how that works. A coffee shop may own an expensive coffee machine that’s essential to their day-to-day operations. If the coffee shop found itself in need of funds, perhaps it needs to purchase a large stock order to cope with an unexpected surge in demand, then it could form an asset refinance agreement with a lender.

The shop would sell the coffee machine to a lender as part of an agreement which would see the machine leased back to the shop.

So, how does this benefit each party?

What are the benefits of asset refinance?

Link

For a lender

Link

For a lender, asset refinance could be an appealing agreement. Having an asset secured against a loan agreement can reduce the level of risk you’re taking by lending money - after all you could always sell the asset if the borrower could not make repayments.

Beyond mitigating risk, asset refinance agreements could also be profitable. The lender could charge an interest rate on the lease, which would see them profit a little from each repayment made by the lender.

The types of assets used in refinancing agreements are typically high-value - as the risk of lending might be not worth it if a low-value asset were to be used in a refinancing agreement.

For a borrower

Link

Our coffee shop could see cash freed up through their asset refinance agreement - and this could happen fairly quickly.

With this money, the coffee shop could make a much-needed cash flow injection in a situation where their business’ health or longevity may seem threatened. Naturally, the ability to make a cash flow injection is reassuring for the business owner as it may help them with cash flow issues such as making repayments to suppliers or acquiring more stock.

There are limitations to how useful an asset refinancing agreement can be, though. Crucially, it’s important that the asset offered by the coffee shop is of sufficient value to ensure that they’re getting access to a good amount of money through the loan. If the coffee machine is only worth say, £3,000, then the likelihood is that they won’t be able to borrow much more than that amount. Refinancing is always limited by the value of the asset, so for example if you wanted to borrow £10,000, you wouldn’t be able to do so if your asset’s worth was £5,000.

Is asset refinancing really worth it?

Link

If your business is in need of working capital, and is not in a position to make large purchases up front, asset refinancing could help you to unlock cash more quickly. The chances are that this type of agreement will be more expensive than simply buying an item up-front, but the flexibility it provides could make it an enticing option to business owners.

At Esme, we don’t currently offer an asset refinancing service, however we do explain working capital and offer our own loan service which could support with your short-term financial needs.

If you’ve decided that you would like to apply for a loan with Esme, please take a moment to read our eligibility criteria below before heading over to our site.

Our eligibility criteria

Link

Our business loans range from £10,000 to £250,000* and can be repaid over a 1 to 5 year time period- meaning you can choose a loan repayment plan that works for your business and its cash flow.

*If you’re a sole trader- these loans range from £25,500 to £250,000.

Before you apply for a loan with us, it’s important to ensure you meet the eligibility requirements below to ensure that you’re able to apply. You must be:

  • Over 18 years, a home owner and a UK resident.
  • A sole trader or Director of a UK Limited company.
  • Registered with Companies House and have been actively trading for at least 3 years.
  • Turning over more than £50,000 per annum and have a track record of making profit.

How could Esme Loans help?

These are difficult times for many businesses, so it’s important now more than ever, to take good care of yourself and your team. If you’re concerned about your business being impacted financially due to coronavirus, visit our advice page for information about how we may be able to support you.