Asset refinancing – why wouldn’t you?

By Ian Corbett, sales director

Raising cash against owned assets is often assumed to be a last resort; something only done by companies with no alternative but to look to their capital equipment base as collateral against borrowings needed to keep the show on the road.

In reality, asset refinancing is used by a wide range of businesses, most doing so in a highly strategic and organised manner, using the released funds for a variety of working capital and investment purposes. There are few, if any, statistics to prove the size of the market but with a good number of lenders offering such facilities, there’s probably more activity in this area than many brokers and industry watchers appreciate.

While there will undoubtedly be an increase in demand for refinancing in weaker economic times, even in current conditions the ease and speed with which a sale & lease-back or hire purchase-back facility can be arranged, allied to the keen pricing available, often combine to create a highly compelling option for creditworthy companies needing to raise cash.

From a lender’s perspective, the risk profile of refinancing opportunities should not vary greatly from transactions involving new asset purchases. There’s no reason why their processes for assessing the strength, suitability and repayment capability of the borrower should deviate from whatever they normally do. Depending upon lenders’ individual risk appetites, the same applies to the due diligence needed on the asset and the title position. So, whether lending decisions normally pivot on the strength of the balance sheet or the asset, or a combination of both, the fact it’s a refinancing transaction should be largely irrelevant.

Arguably, the central focus should be on the purpose of the refinancing and gaining full comprehension of exactly how the funds raised are to be deployed. Does the customer intend to pay down or restructure existing debt? Are they buying another business or seeking a deposit for a new asset? Do they need cash to fund a contract or buy out an existing shareholder?

Whatever the scenario, fully understanding the benefits the transaction will bring is key to executing an effective refinancing. It’s critical to ensure the deal and the debt obligation it creates sit comfortably with the returns being forecast on whatever is planned for the funds, and that any benefits will continue to accrue to the customer more or less over the duration of the refinancing term.

Buying short-term gain using longer-term debt isn’t normally sustainable; therefore lenders and brokers active in this area are usually as focused on this dimension of things as they are on the customer’s balance sheet or the asset underpinning the deal.

So, as with all lending, care needs to be taken, but there’s no reason for brokers to be reticent about promoting asset refinancing as an option to customers. It’s a simple extension of the mainstream market and a side street on the well-trodden path of asset finance that should perhaps be more frequently explored.