Among the various ways to raise extra capital, sale leaseback financing is one of the options that can avoid incurring large debts or employing private equity. You can be a local business in need of sale leaseback financing or a corporation operating elsewhere. Whatever the case, we can assure you that the professionals in our team have more than 30 years of business development experience to help you use this financing method effectively.
The Sale Leaseback Financing Method
As the name easily suggests, this method involves one business selling one of its assets to another entity and then immediately leasing it back. Thus the seller no longer owns the asset but is still able to use it. Real estate and equipment are the types of assets that are commonly sold and the lease is usually a long-term arrangement. The conditions and rental rate may depend on the seller’s credit history, buyer’s financing costs, and projected rate of return.
Sale Leaseback Financing Advantages
Since the seller can continue to use the property or equipment it just sold, there would be no interruptions or delays in productivity. If all other factors remain constant, revenue before and after the sale should be the same.
The additional capital sale leaseback financing generates comes from the cash investment of the buyer/new owner of the asset. The seller now has extra monetary resources to pursue other business goals from paying down debts to purchasing more equipment and expanding operations.
Another benefit that the seller receives is tax savings. Leasing the property or equipment back essentially turns them from assets to contingent liabilities. The monthly rent in fact is completely tax deductible as a business expense. These savings can then also be pooled to become extra working capital.
Sale leaseback financing also has advantages for the buyer. By leasing back the asset, it secured a fair return of its investment and guaranteed a long-term income stream.
This type of asset based lending method practically functions as a loan but the rent isn’t so much a debt payment as an operational cost. Also unlike typical bank loans, sale leaseback financing doesn’t require additional collateral other than the property or equipment being sold. Once all the payments are made the seller regains ownership of the asset.