Searching For The Right Reasons To Consider A Sale Leaseback?
OVERVIEW – Information on the sale leaseback transaction in Canada. When it comes to asset financing what considerations and issues does the lease back require Canadian business owners/managers to consider
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.
All types of business have the ability to consider a sale lease back strategy. While the core of the transaction is the asset itself a number of other considerations and issues arise. While the transaction typically is done for fixed assets of a firm, we must point out also that even real estate is a prime candidate for this method of refinancing.
The asset or assets are the heart of the sale leaseback – 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 course of the new financing. This typically is done when a relatively small balance is still owing and the asset itself still has considerable value.
More often than not we are in fact seeing company owned assets being refinanced under our strategy. The primary reasons for that tends to be a realization by the business owner that owning real estate is in fact not the core business of the firm, and capital could be better deployed elsewhere.
In some cases the main purpose of the refinancing is simply to pay down debt that has come due, matured, or is weighing down cash flow and working capital.
How then can we summarize the key benefits
of asset financing under a sale leaseback. Key reasons are as follows:
Owners of the company wish to take out capital in the business while not depleting operating cash flows
Capital in the sale lease back can often be used to enhance the marketing and revenue prospects of the company
Funds from a leaseback can be used to grow profits and more strongly enhance the firm’s ability to enhance returns on investment and capital
Additional assets 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
It’s important to understand the manner in which a leaseback 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.
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.
At the end of the day what makes a good sale leaseback when it comes to asset financing/refinancing. We think it’s when both the lender and the borrower are properly satisfied with the financial benefits of the transaction -simple as that.
Seek out and speak to a trusted, credible and experienced Canadian business financing advisor who can ensure you’re doing the deal for the right reasons for this valuable business finance options for many firms in Canada.
Stan ProAuthor: Stan Prokop – founder of 7 Park Avenue Financial
Originating business financing for Canadian companies, specializing in working capital, cash flow, and asset based financing. In business 10 years – has completed in excess of 90 Million $$ of financing for Canadian corporations. Core competencies include receivables financing, asset based lending, working capital, equipment finance, franchise finance and tax credit financing.
Info re: Canadian business financing & contact details:
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