Most businesses need equipment just to function, whether it’s computers, vehicles, machinery or other assets. The exact equipment needed often varies between businesses and industries, and it’s essential to obtain the most appropriate equipment for your business, to help your team undertake their daily tasks smoothly and to achieve a competitive advantage in the market place.
As well as the capital or other expenditure required for equipment, companies also need sufficient cash flow to keep up with regular operational related costs between receiving payment of invoices or revenue. Should your cash flow dry up for whatever reason, it could lead to debt and disruption to your operations – a situation that every business is keen to avoid.
Should you find yourself in this unfortunate dilemma, selling your assets and equipment to raise much needed cash might not be the right option for your business when you still need your equipment to perform, leaving you torn between the immediate cash concern and your ongoing productivity. On the bright side, sale and leaseback is a solution to this problem. Your assets can actually prove to be a source of funding for your much needed cashflow rather than selling them at a loss and losing their benefit.
We’ve explained the concept of sale and leaseback in more detail, including how it could help your business.
What is sale and leaseback?
Sale and leaseback is when you sell an asset you own to a lender in exchange for a cash injection, for it then to be leased back to you by a lender. You get the money from the sale upfront and agree to a payment schedule which will see you pay regular instalments for the use of the equipment. This will enable you to have better access to cash by unleashing the capital tied up in your owned assets.
It can apply to a wide variety of assets, including vehicles, large equipment (such as plant and machinery). This means there should be an option for most companies, provided they have equipment of a reasonable value that the lender can utilise.
Pros
The most significant advantage to sale and leaseback is that it gives you quick access to cash when you need it, which could prove crucial if your business is struggling or if you are looking to use the assets to fund the acquisition of a target business. By selling equipment, you will get a lump sum that can be reinvested into your company, helping you address any issues you are facing and receive a cash flow boost.
The added benefit is that you still maintain the use of your assets, which allows you to continue productivity. This minimises the disruption to your operations, enabling you to carry on as usual. It will also prevents your issues from worsening, as any decrease in productivity may deepen financial problems and limit cash flow further.
Another perk associated with sale and leaseback is removing some of the costs and administration typically involved with selling equipment. If you were to sell an asset under normal circumstances, you would have to advertise it for sale yourself and go through the process to find a buyer. That’s not to mention the effort required to purchase or lease replacement equipment. However, with sale and leaseback, you just need to find an appropriate lender to buy the asset and rent it back to you.
Lease rental payments might also be tax-deductible in some cases, which can save you money and make leasing more financially viable.
Finally, leasing will enable you to improve your credit score, provided you stay on top of your payment schedule. This will act as proof that you are trustworthy to lend to, opening access to a broader range of financial support in the future and making you more likely to be accepted for loans.
Cons
While sale and leaseback can help businesses to improve cash flow and access capital when needed, there are considerations you need to make before committing to it.
Firstly, you will end up paying more in the long run by leasing equipment than owning it outright, especially once interest and any other fees are factored in. The lender will also buy the asset at a second-hand price that may be less than what you have it valued in your balance sheet. This might mean you taking a loss on the disposal.
Once you sell an asset, it will be removed from your balance sheet, even if you lease it back. This means that your company’s net worth will reduce, which may have knock-on effects on your eligibility for loans and equity or the value of your shares.
Depending on the contract you agree to, the item may or may not become yours again at the end of the lease term. If it doesn’t, you will need to either obtain a new lease or buy it. This can be a positive in some cases, especially if you want to upgrade your equipment, but you need to be careful to avoid being left without vital assets that enable you to operate.
Finally, you need to make sure you can stay on top of the payment plan agreed with your lender. While the aim of sale and leaseback will usually be to improve cash flow and make it easier for you to meet your financial commitments, it can have an adverse effect if you can’t keep up with repayments. This includes further restricting cash flow, landing your business in debt and even resulting in insolvency. So, it’s critical to be confident that you can afford the lease payments before selling your equipment – if not, you will need to consider alternative options.
Conclusion
Sale and leaseback has many benefits that can make it worthwhile for a business seeking a cash flow boost or as a funding stream for an acqusition. When used correctly, it will help you address the financial issues in your operations at the opportune time, giving you the capital you need.
However, it’s essential to find the right contract that works for you and ensure that selling your equipment doesn’t compromise productivity. By understanding what you must consider, you can identify a fair deal for your business and ensure that you are only reaping the rewards of leaseback, not worsening your problems.
If you are considering the sale and leaseback of your assets, we can help you find the right solutions.