Too Much Of A Good Thing? Why Sale Leaseback Financing works!
OVERVIEW – Information on the sale leaseback transaction in Canada . How does this type of lease transaction work and why and when should your company consider it
A Sale Leaseback of certain or all of your assets ? A good thing ? At various points in the economic cycle a business owner or financial manager considers a sale leaseback financing. Is that type of transaction advantageous, and what are the risks and benefits? Let’s dig in.
Many firms do not fully know about or understand the advantages of this type transaction. This is a classic alternative financing strategy that works best when it is a good deal for the lessee and the lessor. It does not work well when the lessor presumes it is a ‘cash grab’ by the lessee.
This type of financing should be contemplated if your firm has the following characteristics:
– Experiencing working capital challenges
– Declining profits
– Excess unencumbered assets
– High amount of debt
If a company has a high amount of debt a sale leaseback transaction can still be a very positive financing event. By structuring the the transasction as an operating lease the debt becomes ‘off balance sheet ‘. This gives the appearance of the company being not so highly leveraged and quite often it can save the company from being in default of its loan covenants.
In many cases the sale leaseback can bring a significant amount of capital back into the firm.
So when does a firm consider such a transaction – every industry is different but if the firm is bottom line, over leverage, i.e. Debt too high, there can be advantages to an off balance sheet sale leaseback transaction.
If a company has historically had pride of ownership, and has significant assets, and is suddenly going through a high growth stage it also becomes a good candidate for a sale leaseback. Cash flows are restructured and the company gains significant new working capital.
The best candidates, overall, for this type of financing strategy are high growth companies who would prefer to invest additional cash in receivables and inventory. Naturally no lessor wants to consider such a financing if the company is in some sort of death spiral.
In some cases when assets have in fact appreciated (not depreciated in value) the company may actually be able to report a gain in earnings, as the sale leaseback transaction in excess of book value allows the company to book the sale leaseback gain into the profit account!
Many government institutions,
such as municipalities, hospitals, etc may find this type of financing strategy as optimal in solving temporary budget cuts and working capital challenges.
In summary, a properly structured sale leaseback can provide new cash, enhance earnings, and in effect be a creative way to temporarily re finance the firm or institution.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can assist you with your asset finance and refinancing needs.
Author: Stan Prokop – founder of 7 Park Avenue Financial
7 Park Avenue Financial
Phone = 905 302 4171
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7 Park Avenue Financial
Canadian Business Financing