Is a sale and lease back leasing of equipment you own already a good financial strategy? We get that question from a lot of clients so let’s clarify some key issues around this type of equipment finance.
Equipment leasing in Canada seems to be on a tremendous upswing again, having been hit fairly severely in recent years. As a result the sale leaseback strategy we can say was somewhat out of favor in the last couple years, but the good news is, as we said, that times are changing and this finance strategy is back.
In a sales lease back scenario it’s all about the asset and various issues come into play.
Exactly what is the strategy itself though – it’s important for Canadian business owners and financial managers to ensure they understand the benefits of the transaction, how it works, and most importantly, how to get it done effectively.
The sale and lease back strategy is just a twist on normal leasing of equipment. That should be no surprise. Typically either you or the leasing company would purchase or order equipment, which is paid for by the lease finance firm and then leased back to yourself. That’s business equipment financing 101 right? and there’s a lot of benefits to doing that .
However in our sale and lease back strategy you are already of course the owner of the equipment. So you are in a dual role of the seller of the asset, as well as the new potential lessee.
Let’s utilize a short example. Let’s say you are a manufacturer and you have an unencumbered asset, typically perhaps production equipment valued at $ 300,000.00. You may have purchased the asset for significantly more, but the current value for our example discussion is 300k. You then enter into a lease back situation – you ‘ sell ‘ the equipment to your lessor and then lease it back.
So what just happened here? Let’s see. First of all, the equipment you already own never leaves your production floor. You also just got a cheque for $ 300,000.00 to be used for whatever corporate purpose you wish. The monthly payments on the lease would typically be in the 7000/mo range, using a 48 month term as an example.
Let’s examine why a business would use this strategy. The right reasons are typically for additional working capital and the ability to grow the business further. In effect you have monetized valuable assets and are using them to grow sales and profits.
Are rates higher on sale and leaseback transactions? They might be a bit higher, but at the end of the day quite frankly its our experience that they will be commensurate with your overall credit quality of your company , as well as of course the intrinsic or appraised asset value of what is being re financed.
Lessees and business owners opting for a sale lease back strategy should ensure lease terms are kept realistic. If possible we try to ensure that clients aren’t required to also commit further collateral to the transaction if it isn’t required. Lease companies have a habit of trying to over collateralize on occasion!
In summary, as a source of working capital and cash flow for the right reasons the sale and lease back leasing of equipment is a solid financial strategy. Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in maximizing the benefits and avoiding the pitfalls of this strategy.