Asset refinance vs business loans – let’s end the debate.
As a business owner, you are likely to be always on the look out for ways to improve your business cashflow.
After all, we are inherently consumers, and tend to think like a consumer. So when we are looking for finance, we think of bank overdrafts, credit cards and loans as these are the things available to us as consumers.
However, as a business owner there are often many more ways of accessing cash for your business. One of the lesser known ways of injecting capital into your business is through asset refinance. Both of these facilities can be used for expansion, managing cash flow or general working capital boosts.
Let’s have a look at asset refinance vs business loans so you can decide on the best course of action for your business.
What is a business loan?
Probably the most straight forward type of finance. You apply for the amount you need, over the term you’d like to borrow for (weeks, months or years) and then if accepted the money is deposited into your account. You are charged an interest rate which is driven by the type of lender you are engaging with, and various risk factors. These risk factors include the age of your business, it’s financial health, the sector you work in, the amount and loan term length requested and your own personal credit file. Loans can be secured (e.g. backed by a charge on a property) or unsecured (although a personal guarantee is generally required).
Pros of a business loan:
- Flexibility: Once approved, you can generally use the funds for any business purpose
- Wider availability: Loans are widely available with companies offering loans to businesses of pretty much all sizes, and also to companies who are viewed as being a greater risk.
- Can be unsecured: Loans can often be sourced with no collateral required, although the rates tend to be slightly higher for these loans
Cons of a business loan:
- Credit requirements: loan companies can have very strict, rigid credit requirements.
- Collateral requirements for secured loans: if you opt for a secured loan, then you’ll need to pledge assets. Often, this is the family home or other property
So when it comes to asset refinance vs business loans, there are some key benefits and downfalls of going down the traditional business loans route. Next: asset refinance.
What is asset refinance:
Asset refinance is a more specialised form of lending that leverages the existing assets within a business. These assets are already owned by the business (or coming to the end of a current finance agreement) and will be used as security on the finance facility. You essentially sell the asset (such as plant, machinery or vehicles) to a finance company, and then lease it back from them. The asset remains in your possession for your business use, and you receive a lump sum payment. At the end of the agreement, you buy the asset back.
Pros of asset refinance:
- Unlocks capital: It allows you to access cash tied up in your assets without you losing their use.
- Lower interest rates: Because the lender has security, rates are often more completive.
- Accounting benefits: The assets remain on your balance sheet and lease payments can often be treated as a business expense, potentially offering tax advantages
- Allows weaker looking businesses to access cash: Because the lender has security, they can often lend to a business which would not normally be able to access a loan form them.
Cons of asset refinance:
- Not all assets can be refinanced: Lenders primarily underwrite based on asset value, prioritizing its resale potential and liquidity in a default scenario. Niche or specialised assets can be difficult to refinance due to limited marketability.
- Limited to asset owners: You need to own assets before you can refinance them. This can discount many sectors (such as marketing) which don’t rely on large assets to operate their businesses.
- Ties up assets: The assets technically belong to the lender for the course of the agreement. If your business changes and you no longer need the asset, it may be more difficult to sell because you have to ensure the lender is being paid off.
Asset Refinance vs Business Loans: Which Is Better for You?
Better depends entirely on your business, your circumstances and future plans. There are many things to weigh up when considering asset refinance vs business loans.
You may wish to consider a business loan if:
- You don’t own the assets within your business, or your business does not have high value assets in it.
- You have a strong credit history and score
- You require an unsecured option
Choose asset refinance if:
- You own valuable unencumbered assets with a strong resale value
- Your business or personal credit profile isn’t strong, but you own valuable assets
- You want to access potentially lower interest rates by offering asset security
- You’re looking for potential tax benefits associated with leasing
As is so often the case, your individual circumstance can have a huge impact on which decision is the right one for you. If you’d like to discuss the different options available to you and your business when it comes to asset refinance vs business loans, then get in touch for an impartial chat. At Lendedge we have access to a comprehensive range of lenders covering loans and asset refinance and are able to guide you through the entire process.
Asset refinance vs business loans not right for you? Looking for other ideas for business finance? Contact us or check out the Gov.UK explainer blog.