YOUR COMPANY IS LOOKING FOR A SALE LEASEBACK FINANCING!
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A Sale Leaseback of certain or all of your assets? A good thing? At various points in the economic cycle, a business owner or financial manager considers a sale and leaseback financing. Is that type of transaction advantageous, and what are the risks and benefits? Let’s dig in.
DO YOU UNDERSTAND THE ADVANTAGES OF LEASEBACKS?
Many firms do not fully know about or understand the advantages of this type of lease transaction. This is a classic alternative financing strategy that works best when it is a good deal for the lessee and the lessor. It does not work well when the lessor presumes it is a 'cash grab' by the lessee. Fixed assets/equipment and real estate are typical assets financed under this strategy.
4 REASONS TO CONSIDER LEASEBACKS
This type of financing should be contemplated if your firm has the following characteristics:
- Experiencing working capital challenges
- Declining profits
- Excess unencumbered assets
- High amount of debt
MANAGING DEBT
If a company has a high amount of debt a sale and leaseback transaction can still be a very positive financing event. By structuring the transaction as an operating lease the debt becomes 'off-balance sheet '. This gives the appearance of the company is not so highly leveraged and quite often it can save the company from being in default of its loan covenants. Lease payments are typically tailored to your needs.
In many cases, the sale-leaseback can bring a significant amount of capital back into the firm and at the end of the lease asset ownership reverts back to your firm. Interest rates always reflect the credit quality of the overall transaction in the lease agreement and the residual value of the assets.
So when does a firm consider such a transaction - every industry is different but if the firm is bottom line, over-leveraged, i.e. Debt too high, there can be advantages to an off-balance sheet sale and leaseback transaction.
FINANCING OWNED ASSETS MAKES MORE SENSE THAN EVER
If the seller lessee has historically had pride of ownership, and has significant assets, and is suddenly going through a high growth stage it also becomes a good candidate for a lease back. Cash flows are restructured and the company gains significant new working capital
THE NEED FOR ADDITIONAL CASH
The best candidates, overall, for this type of financing strategy are high growth companies who would prefer to invest additional cash in receivables and inventory. Naturally, no lessor wants to consider such financing if the company is in some sort of death spiral.
BOOKING A PROFIT?
In some cases when assets have in fact appreciated (not depreciated in value), the company may actually be able to report a gain in earnings, as the sale and leaseback transaction in excess of book value allows the company to book the sale leaseback gain into the profit account!
ADDRESSING BUDGET CUTS AND CAPITAL NEEDS
Many government institutions, such as municipalities, hospitals, etc. may find this type of financing strategy as optimal in solving temporary budget cuts and working capital challenges. It's more of a long term strategy with a typical lease term being three to five years, although many transactions are structured as renewable 1 year bridge loans depending on circumstances and the asset or assets being financed. It's all about financing the balance sheet on a temporary or long term basis. The lessee and the buyer can typically customize a transaction according to needs,
3 KEY BENEFITS OF THE LEASE BACK
In summary, a properly structured sale leaseback can :
Provide new cash
Enhance earnings
Be a creative way to temporarily re-finance the firm or institution
CONCLUSION
If you would like to check out this unique method of refinancing seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your asset finance and refinancing needs.
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Stan Prokop
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