Sale & Leaseback

Sale and leaseback is a fantastic tool for business to release the captive value held within their hard assets to aid working capital requirements.

After working hard to acquire a portfolio of operational assets in certain circumstances at the right time, it is prudent to convert your balance sheet into cash.

Funding business development growth through traditional means (bank loan, overdraft, increased sales activity) can take time and frustrate the entrepreneurial spirit and potentially miss opportunities in the immediate market conditions. Releasing capital through a Sale and Leaseback mechanism is a well proven method of acquiring funds quickly. It allows you to raise cash whilst still maintaining the ability to use the equipment so there is no change in business operations. Putting this widely under-utilised product into the loan product mix can be a great boost to business operating capital just when the company needs it.

It has to be noted the key factor in Sale and Leaseback transactions is the quality of the underlying asset.

Main benefits of a Sale and Leaseback arrangement include:

1. Quick cash injection: By leveraging assets and leasing them back, a company can unlock funds in those assets, allowing funds flow for other purposes such as consolidation, growth, or investment in business critical applications.
2. Lease products tend to be off-balance sheet financing: as assets are no longer owned by the company, they may be removed from the balance sheet, this may have some benefits to the accounting process.
3. Operational control: The company retains the use of the assets under any lease, allowing it to continue normal activities without disruption while still benefiting from the released capital. Asset finance and leasing equipment comes with many benefits to the SME segment.
4. Tax advantages: Depending on the jurisdiction, there may be tax benefits associated with Sale and Leaseback transactions, such as deductibility of lease payments. We advise you speak to your financial advisors to check on any advantages for your business.

Business executives also need to be aware that releasing capital through these products means some loss of control as you no longer own the asset.

1. Long-term agreements: typically 3-5 years that can’t be cancelled. There is an agreed obligation to pay the lease regardless of current financial performance as with any other business loan. The lease payments over the term may exceed the initial proceeds from the sale of the assets.
2. Equipment redundancy – if the asset fails to perform or cannot be maintained in the future there is an obligation to continue to continue to make the lease payments according to the minimum term of hire. Therefore, it is critical that the term of hire in any sales and leaseback transaction matches the expected usable life of the product. Most leasing transaction do not make provision for service and warranty agreements that is between the lessee and the 3^rd party service provider. You must ensure you have the correct warranties in place before selling any assets through this vehicle.
3. Rental obligations: The company must make regular lease payments to the new owner, regardless of any outside events and this could put pressure on future cash flow positions if not properly considered.

In general, Sale and Leaseback arrangements can be a useful financial tool for companies looking to unlock capital tied up in their assets, but careful consideration of the potential benefits and risks is essential before entering into such transactions.