Should I Raise Capital with a Business Loan or Asset Refinance

Businesses have two main ways to raise capital with a specialist lender: 1) Through a business loan, or 2) by refinancing the equipment they already own.

Both options are viable for a healthy business, although they cater for different circumstances. Below, we’ll take a look at the key differences between a business loan and asset refinance to help you better understand which is right for you.

Business loan

With a business loan you borrow money from a lender to raise capital. The loan can be secured against an asset, such as property, or unsecured. Unsecured loans are the most common loan type. They are for smaller amounts.

The function of a business loan is to raise working capital. That capital is raised based on business viability and capability of repayment. This is the biggest difference between asset refinance and a loan – business loans raise capital by borrowing based on merit, refinancing raises capital by borrowing against the value of an asset.

It’s also important to remember that business loans are more difficult to obtain than refinancing. Loans are in high demand but not every business will get one. If you’ve been turned down before, asset refinance is an easier way to raise capital.

Anything I need to know?

The value of a business loan is determined by its interest rate. The lower the interest rate, the better. The Interest rate on a loan matters because it determines the cost of a loan. It’s the amount a lender earns back on what you borrow.

Higher borrowing limits are reserved for secured loans. You can borrow over £100k for your business by securing the loan against an asset such as your house or car.

Asset refinance

With asset refinance you raise capital by selling equipment to a lender who then loans it back to you. The lender pays you in full for the equipment which your business then keeps for the duration of the finance term.

Why would a company choose asset refinance over a business loan? If assets such as equipment have been paid off in full, they have value. Asset refinance is a form of secured loan that releases cash. These agreements typically offer low interest rates and are a good option if a business is happy with the equipment they have.

With asset refinance, businesses also keep hold of the equipment. Another advantage is accessibility. Refinancing offers the lender security in the form of an asset, so it is easier to obtain and particularly so for businesses with poor credit.

Anything I need to know?

Ownership of the refinanced equipment passes to the lender until a time when the total loan amount is cleared. Once the balance is paid in full, the agreement ends, and ownership passes back to the original owner (the business).

Refinancing is also 100 per cent tax deductible if you offset the payments against your tax bill. This makes it a doubly affordable way to raise capital.