YOUR COMPANY IS LOOKING FOR A SALE LEASEBACK!
DOES A SALE AND LEASEBACK TRANSACTION WORK FOR YOUR FIRM?
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A Sale-Leaseback asset financing option works best when it's done for the best reasons. What then are the considerations the business owner or financial manager makes when executing a lease back option. Let's dig in.
WHAT IS THE DEFINITION OF A LEASEBACK?
Leaseback financing allows companies to sell an asset or assets and lease them back at which time ownership reverts back to the company. Leasebacks are not debt financing or an equity transaction - instead, they monetize assets and bring cash to the balance sheet for assets owned outright by the company.
BOTH FIXED ASSETS AND COMPANY REAL ESTATE CAN BE A PART OF THE LEASE BACK PROCESS FOR BUSINESS CAPITAL
All types of businesses have the ability to consider the typical sale lease back strategy. While the core of the transaction is the asset itself, several other considerations and issues arise. While the transaction typically is done for a firm's fixed assets, we must also point out that even real estate is a prime candidate for this method of refinancing.
It's all about long term financing solutions for the balance sheet to maximize cash flow and working capital when you need it most. The lease term will typically be structured according to your needs around lease payments and cash flow and the asset's size and quality.
At the end of the lease, ownership of the asset being financed reverts back to your company under the seller lessee agreement. It can be a short term strategy, or transactions can be structured as a long term part of your capital structure.
QUALIFICATION FOR SALE LEASEBACKS
The asset or assets are the heart of the sale and lease function - these assets must be unencumbered and free of all lines and collateral registration by other lenders. In some cases, when it makes sense, current financing on assets can also be paid out in the new financing course. This typically is done when a relatively small balance is still owing, and the asset itself still has considerable value.
WHY CONSIDER A REAL ESTATE SALE LEASEBACK?
More often than not, we are, in fact seeing company-owned assets being refinanced under our strategy. The primary reason for that tends to be a realization by the business owner that was owning a real estate investment is, in fact, not the core business of the firm, and capital could be better deployed elsewhere.
REASONS FOR REFINANCE ASSETS UNDER SALE - LEASEBACK SOLUTIONS
In some cases, the refinancing's main purpose is to pay down debt that has come due, matured, or is weighing down cash flow and working capital.
5 KEY BENEFITS OF THE LEASEBACK TRANSACTION - ADVANTAGES TO THE LESSEE
How then can we summarize the key benefits of asset financing under a leaseback arrangement? Key reasons are as follows:
Owners of the company wish to take out capital in the business while not depleting operating cash flows - your firm has continued use of the asset/assets.
Capital in the sale lease back can often enhance the company's marketing and revenue prospects.
Funds from a leaseback can grow profits and more strongly enhance the firm’s ability to enhance returns on investment and capital. You and your accounting team should always review the numerous tax advantages and accounting benefits, as well as other potential legal issues.
Additional assets that are leased back can be purchased with the lease back funding, and funds could also be used to grow the firm’s investment in R&D
In certain cases, it might make sense to refinance the business at lower rates than were previously available - currently, business interest rates are at an all-time low.
HOW IS THE VALUE OF THE ASSET ESTABLISHED
It's important to understand how a lease agreement is created. As the lender, typically a bank or commercial finance firm, is focused on the asset itself (real estate, equipment, technology, etc.), an appraisal is typically required.
Various types of appraisals exist and are mandated by particular lenders. In some cases, it can simply be a ' desktop ' appraisal, where informal research is done on the asset. (Thank You, Mr. Internet). In other cases, extensive analysis and diligence is carried out by a professional appraisal that focuses on current market values, liquidation values in a worst-case scenario, etc.
ACCOUNTING FOR SALE AND LEASEBACK TRANSACTIONS IN CANADA
Leasebacks are typically recorded as capital leases / direct financing leases on the balance sheet as they reflect the contractual obligation of the seller to lease back the assets from the leasing company based on the terms of the agreement which stipulate interest rates, lease term, etc.
DOES A BRIDGE LOAN STRATEGY WORK?
It's important to note that two, let us call them ' subsets' of the lease back, exist. One is that the transaction can be structured as a bridge loan with varying terms. The other is in the context of an Asset-based line of credit, where your asset/assets are monetized within a revolving credit line: same benefits, different paperwork.
CONCLUSION - THE SALE & LEASE BACK AS A FINANCING ALTERNATIVE
Consider what makes good sale leaseback transactions when it comes to asset financing/refinancing? Is your company looking to unlock the capital in your assets? We think it’s when both the lender and the borrower are properly satisfied with the transaction's financial benefits-simple as that.
Seek out and speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor who can ensure you're doing the deal for the right reasons for these valuable business finance options via leaseback transactions for many firms in Canada.
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Stan Prokop
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