Sale and leaseback transactions are sometimes a truly perfect solution cash flow needs. In some ways its a ‘ perfect storm’ of financing – your business gets to keep the asset in question (typically equipment or real estate) while at the same time employing its use and possession.
By the way, that could include your corporate jet – although we don’t run into
a lot of those these days.
What are the fundamental reasons for choosing the lease back? It usually comes down to:
A need for access to capital that otherwise might not be available, or available the rate and structure the business owner/manager desires
Its sometimes a more efficient and quicker process than starting the journey into looking for new debt solutions or having to consider ownership dilution from new equity sources. Alternately the owner/owners of the business are now required to put in additional personal funds
The ongoing need and use of the asset to operate and grow the business – otherwise the asset should probably simply be sold!
In certain cases, as we mentioned, rates and costs of financing might be more attractive under the sale/leaseback
Because of the nature of how the transaction is recorded the lease back, properly structured can enhance the overall ROI – ‘ return on investment
As we noted any asset of the business can theoretically be sold and leased back. A typical solution is business real estate, i.e. the business operating premises. Even Canadian banks in recent years have shed their huge office towers under this effective strategy. – And they of course still inhabit the buildings.
The other asset category is business equipment, which, while depreciating still has valuable use to the business. That raises the point that its important to consider the financial and tax consequences of the leaseback – for example if the funds received are greater than the present value of the equipment a profit on the transaction might have to be reported.
When you enter into this financing strategy your choices are the same as with any other lease financing transaction. Simply speaking you can structure your deal as a capital ‘ lease to own’ or an operating ‘ lease to use ‘. The operating lease might be perfect for things such as a technology transaction for computers and telecom equipt. for example.
And that corporate jet we were talking about? All of a sudden is a perfect candidate for an operating lease!
We caution clients that it’s always important at the start of considering such a transaction its important to fully understand the value of the equipment or asset being re financed. That residual value must be well understood in the context of your company’s needs for the asset and the financing structure required.
Seek out a trusted, credible and experienced Canadian business financing advisor who can assist you in putting together a winning strategy on refinancing business assets. The impossible just became possible.