There is a particular kind of squeeze that catches trades, manufacturers and haulage firms: a big order lands, it needs materials and wages up front, the bank overdraft is small or nonexistent, and meanwhile there is £40,000 of machinery sitting in the unit fully paid for. Asset refinance is the route that turns that second fact into an answer to the first.
It is also routinely mis-sold, usually to businesses that should be fixing something else. So it is worth understanding what it actually is, what it costs, and the tax consequence that brokers rarely lead with.
What it actually is
A financier buys an asset you already own at an agreed value, pays you the money, and leases it back to you over a fixed term. You keep using the asset throughout and, under the hire purchase style structures most small businesses use, ownership returns to you at the end of the term for a nominal fee. Sale and leaseback is the same idea, most often applied to a single higher-value item.
It is secured against a specific asset, which is why it is available to businesses that a bank has already turned down for unsecured lending. The lender's downside is a machine they can sell, not a covenant they have to enforce.
What it costs — a worked example
Take an illustrative case. A three-year-old machine, independently valued at £40,000. A financier advances 70% of that value — £28,000 — over 36 months at roughly £950 a month.
That is £34,200 repaid in total, so £6,200 is the cost of the finance over three years. Whether that is expensive depends entirely on the alternative. Against a merchant cash advance or a short-term unsecured loan it is cheap. Against an overdraft you could have arranged, it is not. And against losing a £60,000 order because the materials could not be funded, it is trivial — which is the comparison that actually matters, and the one people forget to make.
Note the two numbers that decide the deal: the advance rate against valuation, and the total repayable. Not the rate. As flat rate, APR and factor rates explains, a headline percentage on asset finance can mean several quite different things, and the only figure that cannot be dressed up is the total you hand over.
Refinancing an asset does not create money. It moves cash forward in time and charges you for the trip. That is worth doing when the cash has a specific job to go to.
The tax bill nobody mentions
Here is the part that surprises people. If you claimed capital allowances on the asset when you bought it — annual investment allowance or full expensing, which for most small purchases writes off the whole cost in year one — its tax written-down value is nil. Selling it therefore brings a balancing charge: the disposal proceeds get added back to your taxable profits, up to the original cost of the asset.
On a £28,000 disposal at the 25% corporation tax main rate, that is up to £7,000 of tax in the year you refinance. The cash arrives in month one and the tax consequence follows in the same accounting period, which can turn a well-planned working capital move into a nasty January. There are also specific anti-avoidance rules that restrict the allowances available on the leaseback side of a sale and leaseback.
None of this makes the deal wrong. It makes it a deal that needs quantifying properly first, which takes your accountant about half an hour. What you can write off when you buy kit covers the allowances side of the same coin.
When it makes sense
When there is a short, defined working capital gap with a clear end — a large order to fund, a seasonal build, a contract with slow payment terms behind a fast delivery schedule. When the asset has years of useful life left and a genuine second-hand market, so the valuation is real. And when the alternative funding is either more expensive or simply unavailable.
When it doesn't
When the asset is near the end of its life or you will want to replace it before the term ends, because you would be paying for a machine you no longer use. When the money is going to plug an ongoing trading loss rather than fund a specific piece of work — refinancing converts a one-off lump into a monthly commitment, and if the hole is structural you have made next year worse in exchange for making this month easier.
When the asset is already on finance, because you can only refinance the equity you actually hold in it. And when an existing lender holds a debenture or fixed charge covering that asset, in which case their consent is required and may not be given.
Questions to ask before you sign
How was the asset valued, and by whom? What is the advance rate against that valuation? What is the total repayable and the monthly figure — in pounds, not percentages? What are the early settlement terms, and is there an exit or option-to-purchase fee at the end? Who insures and maintains the asset during the term? What happens if you sell the business or the asset mid-term? And what documentation or arrangement fee is being added to the total?
One further test worth applying, which has nothing to do with the finance: write down what the money is for and what it will produce. If you can answer that in a sentence with a number in it, asset refinance is a tool. If you cannot, it is a way of spending an asset you have already paid for. Asset finance versus buying outright covers the same decision from the other direction, when the kit is new rather than already yours.
Common questions
What is sale and leaseback for business equipment?
It is a way of releasing cash from an asset you already own outright. A finance company buys the asset from you at an agreed value, pays you the proceeds, and immediately leases it back to you over a fixed term, usually two to five years. You keep using the equipment throughout and, under the hire purchase style agreements most small businesses take, ownership returns to you at the end for a nominal fee. Because the lending is secured against a specific item with a resale value, it is often available to businesses that would not get an equivalent unsecured loan from a bank.
How much can you raise against equipment you already own?
Typically a percentage of an independent valuation rather than what you originally paid or what the accounts show. Advance rates commonly sit somewhere around 70% of value, though it varies with the asset type, its age, and how liquid the second-hand market for it is. Standard, widely traded equipment — vans, plant, common machine tools — attracts better terms than specialised kit that only a handful of buyers would want. The valuation basis matters as much as the percentage, so ask whether the figure is a trade value, a forced sale value or an open market value before comparing offers.
Does asset refinance create a tax bill?
It can, and this is the most commonly missed part of the deal. If you claimed capital allowances when you bought the asset — annual investment allowance or full expensing usually writes off the full cost in the year of purchase — its tax written-down value is nil, so the sale proceeds create a balancing charge that is added back to your taxable profits, capped at the original cost. On a £28,000 disposal in a company paying the 25% main rate, that is up to £7,000 of corporation tax in the same period the cash arrives. Anti-avoidance rules also restrict allowances on the leaseback itself.
Is asset refinance seen as a warning sign by other lenders?
Not in itself. Asset refinance is a normal funding tool, particularly in construction, haulage and manufacturing, and a lender looking at your accounts will read it in context. What does raise questions is the pattern around it — refinancing the same assets repeatedly, refinancing to cover day-to-day trading losses rather than a specific project, or doing it alongside stretched creditor days and an overdrawn director's loan account. A single refinance funding a named contract, repaid on schedule, reads as competent cash management. Several in a row reads as a business running out of room.
