How to Use Asset-Based Loans for Business Debt Refinancing

A business may be able to achieve several goals by refinancing existing business equipment, including improving cash flow, consolidating debt, and streamlining operations.

Sometimes, a valuable source of capital you already own may be hiding in plain sight. Business equipment can be a storehouse of usable capital, ranging in value from a few thousand dollars to millions. When the real value exceeds the amount owed on the equipment, that difference represents equity, which can unlock working capital, repay debt, or fuel growth.

You may decide to refinance equipment for any number of reasons. Equipment refinance means paying off your current loan or lease with the proceeds of a new loan, using your equipment as collateral.

If you have a loan outstanding on the equipment, your new lender will pay your old lender, but you still have an obligation to repay the loan. Your business can benefit from reduced payments or free up capital with equipment refinancing. If the equipment is no longer financed, it may serve as collateral for a loan for working capital. In some cases, a single transaction can do both.

Five Benefits

Here are five benefits to refinancing your business’ income-generating equipment. Many businesses, such as waste industry companies, depend on valuable equipment to generate income and they often have a lot of capital tied up in their equipment. Refinancing that equipment can pay big dividends.

First, you may be able to reduce your monthly payments. Refinancing often results in lower payments and improved cash flow, typically by lengthening the repayment period.

Second, avoid a balloon payment. If your agreement requires a balloon payment at the end of the term, refinancing the loan before the balloon payment is due can create a new loan that pays off the original loan and puts you on a less burdensome payment schedule.

Third, lease buyouts. When the term of the lease is finished, there is typically a buyout payment. Unfortunately, many lessors will not finance the residual payment, even if you have been paying regularly as agreed. A refinance loan, secured by your leased equipment, can pay off the residual value, leaving you with the equipment you need and in your hands, financed.

Fourth, cash out. Machines and other equipment represent capital assets. If there is equity in the asset, then you may be able to borrow against it. In fact, you may be able to refinance your equipment, whether it has a debt service on it or is paid off, so long as you can find a lender who understands your equipment and sees its value.

If you take out a loan against the equity of your equipment, you’ll gain working capital via the loan proceeds. This can be used in a number of ways, including:

• Purchase new equipment, raw materials, real estate or upgrades to your buildings.
• Repay other debts, including taxes and lines of credit.
• Retain a reserve of cash, which can act as a financial cushion.

Fifth, debt consolidation. By refinancing existing loans, which may have several payments and different payment terms, and putting them into one loan, you simplify your debt with one monthly payment. A lender looks at your equipment and its equity to determine how much they can refinance to pay off the existing loans.

If all the loans that are to be consolidated are equipment loans, the lender can roll them all up, pay off the original lenders, and you have one loan and one monthly payment.

If you have other kinds of debts, such as merchant cash advances, or other business loans in addition to equipment loans, the lender will look to determine if you have enough equity in your equipment to cash out and pay these loans as well.

Debt consolidation is particularly helpful when it can consolidate expensive debt. Whether the loans have high interest rates, rough payment terms like an MCA’s, or balloon payments, consolidating them into one loan streamlines the number of payments and makes your books easier to manage.

It is possible to do more than one of the above with a single refinance. Being aware of how much equity you have in your equipment and working with a lender who is experienced in your industry and knowledgeable about equipment can help maximize how much you can borrow.

Make Sense from a Cash-flow Perspective

Is refinancing equipment worth it for your business? To find out, follow these steps.

First, estimate your equity. Based on the actual market value of your equipment, you can determine how much equity you have in the equipment. (The market value may be more or less than the book value, which is calculated as the original purchase price minus depreciation.)

Second, work with your lender to determine what a refinance payment will be.

Third, determine what your current payments are on the debt that would be refinanced.

Fourth, subtract the estimated payment of the new loan from the total of what is currently paid on debt that would be refinanced.

If that number is positive, it’s likely that refinancing your equipment would make sense from a cash-flow perspective. An experienced lender can help guide you through the process of valuing your equipment, and understanding terms and options available to you.

What Lenders Need and Why They Need It

Applying for a refinancing loan requires certain documentation so that your lender will understand your needs and objectives and can make recommendations that are in your best interest. Here’s what lenders need and why they need it.

• Equipment information. The make, model and hours or mileage will help your lender to determine actual value of your equipment.
• Debt schedule. A debt schedule shows the existing principal balances and monthly payments.
• Tax returns or financial statements. Financial statements or tax returns provide data so that the lender can understand the financial health of the business.
• Credit references, and a business narrative that explains your company’s history and future.
• A signed credit authorization and company contact information.

Beyond paperwork, what equipment and debts are eligible? The answer usually has to do with your lender’s expertise with the equipment. Some banks, for example, only finance new equipment and do not do refinances or work with used equipment.

When it comes to debt, it is possible to pay off lines of credit, tax liens, and merchant cash advances with the cash proceeds of an equipment refinance.

By reducing the number of loans and leases you need to manage, refinancing can also streamline your operations. If you think you could benefit from refinancing your business’ equipment, discuss the possibility with your lender.