When companies need to grow, they need capital – it’s that simple. Businesses can secure and raise capital funds in a number of ways, most commonly by accruing debt, or by releasing equity. Debt has to be repaid, and equity comes at the cost of ownership.
A sale-leaseback is recordable neither as debt nor equity – rather a hybridized transaction in which the owner of an asset, property or business sells their asset and the buyer leases it back to the seller. It functions as a loan, with payments working to re-establish ownership. The result is an injection of cash into the seller’s business.
Benefits for Business Owners
The most typical users of sale-leaseback agreements are companies with high-value fixed assets. A sale-leaseback comes into effect when a business needs to use the capital invested in their fixed assets to leverage the purchase or lease of other assets to grow. Through transferring title to the buyer, leaseback deals enable the seller to regain use of the capital used to purchase their equipment, while at the same time, they secure the use of those same assets for a lease term.
Take, for example, an instance where a transportation company finds the need to expand their fleet of 18-wheelers. A sale-leaseback deal with a financial institution like Travelers Finance may be the perfect solution since the company can continue to use its existing fleet of trucks to sustain the business while expanding to accommodate an increasing number of clients, jobs, and revenue. Instead of traditional payments, a surge of capital is returned to the seller and a lease payment schedule is agreed upon.
Further, a buyer can usually position the initial lease term for a period of time that benefits the businesses’ needs without the consequence of increased payment, financing or any conventional issues of financing.
A sale-leaseback deal also presents renewed options to the sellers, while conventional borrowing or mortgages offer little or no guarantee for refinancing. Leaseback deals can also provide the seller with beneficial tax deductions, and the avoidance of some legal fees.
In recent real estate markets, a substantial increase has been realized for leaseback agreements in part because of a slower economy and strict lending guidelines from financial institutions. An important practical use of a leaseback is therefore in finding an alternate source of financing when economic times make it difficult for a business to grow.
Given the current lending culture of worldwide markets, leaseback agreements are projected to remain popular alternatives to traditional borrowing into the foreseeable future. For businesses that want to capitalize on their invested equity in equipment, sale-leasebacks are attractive options to consider when seeking to invest capital for other strategic purposes – such as equity distribution, business growth, or expanding/updating construction and transportation equipment.