Asset refinance explained

Asset refinance explained

Asset refinancing has a few different meanings depending on the context. It could refer to:

• Using an asset as a security or loan.

• Asset finance combined with (or in addition to) other finance.

• Debt consolidation: refinancing business debt.

Refinance combined with other finance

One advantage of refinancing is that you don’t need to own the asset(s) outright, because lenders will base their offer on the equity you currently hold. Refinancing is always limited by the value of the asset(s) on offer — you couldn’t borrow £10,000 secured against an asset worth £5,000 — but with enough equity in an expensive item, you could still unlock a sufficient amount of cash for your requirements.

That means that if you’ve got a piece of equipment through hire purchase, for example, you could raise finance against it even with money still to pay off to the hire purchase provider.

Asset refinance example

Joe’s construction firm has a piece of machinery worth £10,000. He got it on a hire purchase agreement, and only has £1,000 left to pay. That means he has £9,000 of equity in the item — or to put it another way, Joe’s company owns nine-tenths of the machinery, and the hire purchase provider owns the remaining tenth.

In this situation, provided it’s the right kind of equipment, Joe could refinance his company’s machinery up to the value of about £6,000 (so 70% of the item’s overall value) — the refinance lender would pay the hire purchase firm the remaining value of £1,000, take the charge over the asset, and lend Joe £6,000 based on its value.

Equity is the key to refinancing

The arrangement would work in a similar way if Joe owned the asset outright, but in that scenario, he’d probably be able to raise more money against it. In the first example, Joe effectively owns an asset worth £9,000 because he has 90% equity of £10,000; in the second case, he owns 100% of it, so his equity is worth the full £10,000.

You can apply the same logic to any asset that a lender will accept as security — for example, if Joe owned a commercial property worth £500,000 and had £200,000 of a commercial mortgage left to pay off, he effectively owns an asset worth £300,000, and might be able to refinance and get a loan based on that value.