YOUR COMPANY IS LOOKING FOR A LEASE FINANCING COMPANY FOR A SALE LEASEBACK!
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The sale leaseback transaction in Canada. It's back. Let's examine the resurgence of this unique financing transaction via a lease finance company or other financial firm.
Canadian business owners and financial managers, as owners of certain asset classes, have the ability to enter into a sale leaseback scenario. It couldn't be more basic - you sell the asset to a buyer, typical a finance firm and that firm immediately becomes the lender or lessor of your transaction. And that asset is of course still there!
The two key elements that are happening should be quite clear - you have received cash flow and working capital for your firm on an asset that was unencumbered, and at the same time you are still (hopefully!) using the asset to generate profit and operational capabilities for your firm.
In essence, you're getting capital and cash flow from an asset that was otherwise non-performing. It's important to point out that your balance sheet still stays intact from a viewpoint of leverage, and in certain cases can actually improve.
It should go without saying that the financing can be a combination of one asset or even different asset classes. For instance, you could do a sale leaseback on your premises and the equipment if you are a manufacturing firm in Canada.
We referenced earlier the 'evolution' of the sale leaseback. In recent years a lease finance company was somewhat more reluctant to enter into such a transaction; if we could be blunt and straightforward (that’s our style!) transactions of this type were viewed as a 'cash grab' by firms who had some significant challenges. The bottom line - it wasn't readily apparent the transaction made sense... For the lease finance company or other lender!
We like to view the transaction as simply one additional tool kit in the business owner’s pouch of financing or re-financing alternatives. If your firm is expanding or is in a position of having to repay or arrange some other business debt then the transaction might make significant sense. Other times the new capital simply can make your business either grow or be more efficient.
Another way of looking at it is from the viewpoint of your core competencies - do you in effect necessarily want or need to be an owner of certain assets? Just for the sake of ownership.
Naturally, it's critical to determine the amount of capital you can extract from such a transaction. Business owners should ensure, either on their own or through an advisor, that they have a solid understanding of the current market value of the asset. However, if the truth were to be told (again, that’s our style!), you will probably be required to get an appraisal done at your own cost at the request of the lease finance company or other lender.
Appraisals themselves have many nuances, and this is simply one more solid reason to ensure you have some solid advice in this area. Lenders or lessors focus on the liquidation value of the asset in a 'worst case' scenario. Business owners tend to view the asset in terms of its value today and in the business in the future. There is often a large difference between those two points of view!
The sale leaseback can also often enhance your operating ratios such as debt to equity, etc. You definitely want to be in a position to understand the effect of the transaction from an accounting viewpoint, as well as ensuring you have permission from any other 'secured lender' to complete the transaction properly.
When working capital, cash flow, growth, or balance sheet issues force you to consider alternative methods of raising capital don't forget those 'treasures in the barn' - i.e. the assets you have in your firm that you own already.
Speak to a trusted, credible and experienced Canadian business financing advisor on how the sale leaseback transaction has evolved into a solid business financing tool your firm can use today.
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Stan Prokop 7 Park Avenue Financial/Copyright/2020
