Consider These Two Outside-The-Box Financing Solutions

YOUR COMPANY IS LOOKING FOR SALE LEASEBACK OR SECURITIZATION FINANCING!

ASSET BACKED SALE LEASEBACK TRANSACTIONS & REFINANCING STRATEGIES

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Canadian business owners and/or their financial managers might not necessarily be fully familiar with two sold financing strategies, the sale leaseback of assets, and the potential ability to enter into a securitization facility. Let's cover off some basics.

CONSIDER THESE ADDITIONAL IMPLICATIONS IN EVALUATING SALE LEASEBACKS

When it comes to a sale leaseback scenario there are some accounting, tax and financial statement issues that we also encourage clients to consider. It might be time to give your accountant a call!

WHY A SALE LEASEBACK

So when in fact does doing a sale leaseback make sense? Although it is often used when the company cannot obtain bank financing, that is not always the case and it's still a beneficial long term strategy when your company requires a capital infusion of some sort.

The interesting thing about this method of refinancing is that quite often the assets in questions are of value, and are not pledged to another lender. They belong to the company and can assist the company who is, as the expression goes ' asset rich ' but ' cash poor '.

WHAT ASSETS MIGHT BE CONSIDERED IN THE SALE LEASEBACK PROCESS

Typical assets that are used in a sale leaseback include phone and computer systems, manufacturing equipment, heavy construction machinery, rolling stock, real estate, ... etc!

The strategy itself could not be more simple- your company sells the assets, or real estate, to a leasing or finance firm in exchange for immediate working capital. The asset or assets in question are simply leased back to the business with the full intention of reacquiring the asset.

One area of caution is that complications can ensure when its time to confirm you have the ability to enter into a transaction such as this. Simply speaking, other creditors of your firm may be asked to confirm they hold no security in the collateral being refinanced... that just makes sense.

UNDERSTANDING THE TRUE VALUE OF YOUR ASSETS

Because different assets have different life cycles and value its important to get a firm understanding upfront as to the true total financing capability you can extract from this type of transaction.

Payments under a sale leaseback loan or lease are commensurate with your credit quality as well as the true liquidation value of the assets. That’s not how you might look at the transaction, but we assure you the lender does! It's all about the balance sheet!

WHAT IS SECURITIZATION

On to our other relatively unused and unknown financing, ' SECURITIZATION '. If your firm is over-leveraged or simply doesn’t have access to the liquidity you need.

In some ways securitization is a more complex type of sale leaseback - however, instead of financing your hard assets you are financing future cash flows that come from receivables, or what we can broadly call ' cash flow contracts '. Oh, and by the way, larger public companies do this all day, every day as a way to enhance balance sheets.

Although some of the mechanics of a securitization might be viewed as complex by a small firm, medium-sized or larger firms simply collateralize those rights to collect in their A/R or contracts. They more often or note are responsible for any shortcomings in future collections.

Naturally for the securitization lender they are looking at both sides of the coin, the quality of your cash flows coming in, as well as the overall credit quality of your customer base. Here issues such as concentration, geography, type of asset, etc come into play for the final financing decision. Lenders can protect themselves even more by holding back some of the funds; in effect, they are over collateralized.

So, whether it’s a leaseback transaction of hard assets or securitization of cash flows your company might to well to investigate each method to see if it works for your firm.

CONCLUSION

More and more businesses in Canada, pandemic times included, are looking at commercial financing solutions such as the leaseback transactions to bring additional liquidity into the business. It is a complementary solution to existing credit facilities that might be in place such as senior lender credit lines, etc.

The ability to also potentially negotiate repayment under current cash flow circumstances is also appealing to business owners, as well as our aforementioned interest rate consideration.

While in some cases the consideration around a leaseback might be simply the current low-interest-rate environment, it more often than not is cash-flow considerations. The ability to use the assets in your business to evaluate cash flow options is simply additional financial flexibility in your capital structure goals.

Speak to a trusted, credible and experienced Canadian business financing advisor who can assist you in evaluating these great, and unique business financing mechanisms.