Asset finance can help grow a business and release capital

Asset finance can be a helpful way to relieve pressure on cashflow. It is also often easier to obtain than traditional bank financing. Abbey Watkins explains the opportunities and risks.

COVID, Brexit and the cost-of-living crisis have all taken their toll on businesses. Even well-established businesses that have been trading and profitable for a number of years have taken a hit.

As we emerge into the new business landscape, we are starting to see profitability and cash flow issues materialise across the board.

It is, therefore, especially important to know what options you have in your arsenal when times get tough, and how you can obtain funding to smooth out any potential issues.

Asset Finance

Asset finance is a great option for businesses that have historically been profitable but have seen a downturn in profitability in recent years.

Asset finance refers to:

• Finance secured in respect of the purchase of new assets.
• Re-financing of existing assets to release capital into the business.

The focus of this article will be on the re-financing of existing assets.

One of the benefits of asset finance is that it tends to be far easier to secure than traditional lending, especially where profitability of the business is limited. This is because an asset finance loan will typically be secured against existing assets within the business, providing an extra layer of security to the lender.

There is a risk, however, that if you default on the loan for any reason, the lender may re-possess the assets against which the loan was secured. Despite this, the additional layer of security can lead to a further benefit, as it means that asset finance is often cheaper than traditional lending.

What counts as an asset?

Asset finance can be secured against a wide variety of assets and does not have to be expensive machinery or motor vehicles. Therefore, the availability of asset finance is not specific to any sector.

Examples of assets that qualify for asset finance, which you may not have otherwise considered, include:

• Air conditioning units
• Warehouse racking
• Scaffolding

Assets that are fully depreciated within your accounts are not entirely out of the question either. If these assets have a market value, irrespective of their accounting value in the businesses balance sheet, asset finance may be available on them.

Nominal guarantees

In the current lending landscape, almost all lenders will require a personal guarantee, either for the amount borrowed or to seek a ‘nominal guarantee’. This ‘nominal guarantee’ typically covers the interest payable on the loan, and potentially any expected fall in value of the asset over the course of the loan term. Therefore, it can avoid a personal guarantee on the full loan value. This can be a particularly appealing selling point considering the continuing economic uncertainty.

Different types of asset refinance

There are two main types of asset re-finance. The differences are subtle but crucial for decision making.

Traditional asset re-finance uses the asset as collateral for security over the loan received, but the ultimate ownership of the asset remains with the business – providing that loan repayments are made in line with the agreement.

Sale and leaseback can also be a form of asset refinance but results in the ownership of the asset being transferred to the lease company. Should the company want to repurchase the asset at any point in the future, they will need to agree a price with the lease company.

Traditional asset re-finance is generally the cheaper option of the two, as you retain ownership of the asset and therefore there is no re-purchase cost at the end of the agreement.

Despite this, you may opt for a sale and leaseback arrangement instead where there is concern about the balance sheet position of the company. This is because there is no actual borrowing associated with sale and leaseback, and therefore you avoid having an additional liability on the balance sheet.

In summary, using your pre-existing assets as leverage for lending, in order to release capital required by the business, could open avenues to lending that may otherwise be inaccessible.

To learn more about obtaining funding for your business, be it through asset finance or otherwise, contact us today and a member of our dedicated Funding team will be in touch.