YOUR COMPANY IS LOOKING FOR A SALE AND LEASEBACK SOLUTION!
Working Capital Woes? Sale-Leaseback Financing Can Bridge the Gap
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Financing & Cash flow are the biggest issues facing business today
ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT BUSINESS FINANCING OPTIONS?
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Oakville, Ontario
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BRIDGING THE GAP WITH SALE-LEASEBACK FINANCING - UNLOCKING THE VALUE OF BUSINESS ASSETS
A Sale-leaseback strategy, if executed properly, is a classic refinancing scenario. In this financing arrangement, a business sells an asset/assets and then leases it back - this provides valuable working capital that frees up the equity that was in the asset - This type of ' bridge loan' provides needed liquidity for the cash flow/business needs of the company via short terms loans that are strategically structured around immediate business needs.
A CREATIVE FINANCING SOLUTION FOR WORKING CAPITAL NEEDS
Leasebacks can be accomplished via business asset or real estate financing solutions for a property sale and leaseback lease financing or under various asset-based lending solutions in corporate financing In Canada. Sale Leasebacks provide business liquidity without the company considering additional capital investment or debt financing as part of its financial planning for additional financial flexibility. The equity release in the refinanced asset is a solid alternative financing option for many businesses.
How does the lease back work as a finance source, and whether it’s a bridge loan or finance lease, what are the key benefits and mechanics of this financing solution when you might be at your borrowing limit?
WHY A LEASEBACK - EVALUATING THE PROS AND CONS OF BRIDGE LOAN
It greatly appeals to small and middle market companies looking for business financing options, a financing rate, and lease terms that match their particular needs when they don't have access to more sophisticated capital markets and still want to keep the utility value of assets in question. In some cases, this type of transaction allows cash distribution to the owner/owners. Let's dig in.
WHY CONSIDER THIS TYPE OF FINANCING - LEASEBACK BENEFITS FOR EXPANSION AND GROWTH
Sale leaseback transactions are typically utilized when a firm such as yours is looking to generate cash proceeds and working capital from unencumbered business assets and who at times are unable to access bank financing from business credit markets while giving you at the same time bargaining power regarding your assets.
These assets on the balance sheet can be almost any tangible asset, including trucks/vehicles, real estate assets, technology, shop floor equipment, etc. In the case of real estate it's an alternative to mortgage financing. An owner-occupied real estate investment is a great investment to keep for the long term. They still have operating value to the firm. Proceeds of a company sales transaction bring value back to the balance sheet.
HOW DOES SALE LEASEBACK WORK?
The legalities of the transaction are simple. As the owner of the asset, your firm sells it back to a leasing company. That creates a lease financing (or, in some cases, a bridge loan) which not makes your company the lessee or borrower in the transaction as part of a short-term or long-term lease agreement.
CASH GENERATION / MAXIMIZING LIQUIDITY
Naturally, the key benefit of the deal is your ability to generate cash from the deal, while at the same time using the asset to hopefully generate profits and operational efficiencies within your firm at a time when all the bank credit you need is not available.
DETERMINING TRUE ASSET VALUE
A key factor in the whole transaction is, of course, the value of the asset. As we've experienced over the years business owners tend to place a higher value on the asset or assets in question as opposed to the lender! So how then is this problem or challenge addressed?
POTENTIAL NEED FOR AN APPRAISAL
Typically the answer is a third party appraisal. Larger sale-leasebacks are rarely consummated without an appraisal. In years gone by, lenders were skeptical of this method of refinancing simply because they viewed it as a ' cash grab ' by the customer. These days, when properly structured and valued, it’s a solid mechanism of refinancing that, more often than not, makes a lot of sense when it comes to a tailored lease payment to your cash flow via market lease rates, etc.
FINANCING ALTERNATIVES
Companies looking at financings such as a mezzanine debt financing tool from alternative finance and mezzanine lenders will generally find that sale leaseback transactions are less costly and extension options deliver maximum flexibility in areas such as lease expiration.
THE IMPORTANCE AND VALUE OF APPRAISALS
A common mistake many business owners and financial managers make is to solicit an appraisal on their own looking for greater value in the asset. That problem complicates two main things -
Lenders like their own appraisers, not yours!
Dollars can be spent on the wrong type of appraisal (there are three types)
Obviously, the best solution is when you and your lessor or lender agree on who will be performing good due diligence efforts via the appraisal, and what type is mandated for a timely investment decision and an offer price acceptable to both parties. The three types of appraisals include
FAIR MARKET VALUE VIA MARKET RESEARCH
ORDERLY LIQUIDATION
FORCED VALUE LIQUIDATION
Lenders and lessors will more often than not ' go conservative ' on the asset and focus on the dollar value of the orderly and FLV asset liquidation prices. Because most (not all) lessors and lenders don't have significant asset expertise in diverse industries they want to know they can be disposed of an asset quickly in a worst-case scenario, even a real estate asset.
That worst case is of course a business failure. Equipment proceeds and real estate proceeds can bring significant cash to the balance sheet via sale leaseback proceeds. In the real estate this scenario for property owners will be more expensive than mortage rates but less expensive than mezzanine finance - these days any basis points make a difference.
DO YOU NEED A BUSINESS PLAN?
For certain transactions, it might be appropriate to have a business plan in place - particularly more significant transactions where your firm is trying to position the true value of a transaction. 7 Park Avenue Financial prepares business plans that meet and exceed bank and commercial lender expectations.
SALE AND LEASEBACK ADVANTAGES AND DISADVANTAGES
Sale-leaseback financing brings immediate benefit in the form of cash flow and working capital from the equity in business assets and or real estate. This short-term infusion of cash allows businesses with assets/equity ownership to maintain the use of the assets while gaining access to business capital. Due to the specialized nature of these financing options, sale-leasebacks come with various tailored terms and structures customized to the needs of the business borrower. Assets that were originally financed at high-interest rates can be refinanced in a lower-rate environment.
It's important to note that a leaseback or bridge loan has some tax purposes and accounting implications, so generally, sale-leaseback accounting should be reviewed with your financial team or 3rd party accountant. In some cases tax savings and book values of assets will come into accounting play. When it comes to financing rates the interest rate on your transaction will vary with transaction size and overall credit quality of your company and the asset/assets.
CAPITAL VERSUS OPERATING LEASES
There are two types of leases in Canada - capital and operating. Operating leases are less in vogue due to international accounting standards being rewritten. So most often, the sale-leaseback/bridge loan is constructed as a full payout capital lease with fixed interest rates and monthly payments. The bottom line is still the same - new cash on your balance sheet.
In a small number of cases, equipment already under the lease can be refinanced also, although this is not really a classic leaseback... it’s just refinancing an unencumbered asset such as real estate or equipment. In some cases, an alternative to the lease back is to simply pledge the asset or asset in question under another type of financing arrangement, depending on overall credit strength.
CONCLUSION - UNLOCKING WORKING CAPITAL WITH SALE-LEASEBACK FINANCING
Our bottom line for the business owner looking to benefit from some asset company sale transaction? Let this method of refinancing existing assets make sense for your firm when the planets align relative to asset value, cash needs, your growth objectives and accounting sense and as an alternative to mezzanine capital.
If you are forced to maximize liquidity with sale-leaseback financing arrangements, speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can assist you with your refinancing needs - it's a great short-term solution to a long-term problem of capital structure and your company's balance sheet.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO /ASK MORE INFORMATION
What is sale-leaseback financing, and how does it work as a bridge loan for working capital?
Sale-leaseback bridge financing is a business financing solution whereby a company can sell business assets or property it owns and then enter into a leaseback transaction structured as a term loan or lease; the equity in the asset allows the company to receive cash for short-term funding to cover operations or other business needs from appropriate bridge loan lenders or other alternative lenders.
What are some of the risks associated with using sale-leaseback financing as a bridge loan for working capital?
Business owners should consider any risk involved in sale-leaseback financing/bridge loans. In certain situations, the terms of a transaction can be regarded as onerous as it relates to interest rates and financing costs. Additionally, companies should consider the potential depreciation of the asset or assets being refinanced. A default in the leaseback arrangement could trigger business disruption and risk losing required assets. Bridging loans can be accessed much more quickly than financing from traditional financial institutions such as banks - Financing can also be used to retire government super priorities.
What is the main advantage of a bridge loan?
The main benefit of bridge debt financing is that bridge loans typically can be accessed relatively quickly. Borrowers in some cases, may pay high-interest rates, but most bridge loan structures are typically short-term loan structures with some associated closing costs and an origination fee. Typically a bridge loan is not a long-term financing solution - allowing the company instead to meet some urgent current expenses.
Are bridge loans/leasebacks expensive?
Bridging loans can be expensive as a typical leaseback/bridge loan might include an interest rate as well as an origination fee or closing fee - It is important to note that bridge finance solutions such as the leaseback are usually short-term financing solutions with a goal towards a long term financing permanent solution that might be more traditional. The rate of interest in a bridge loan lease solution might be either a monthly payment structure or; interest will accrue with no monthly payment or interest payments under a balloon loan type structure,
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