Sale and leaseback, and asset refinancing are both ways that businesses can make the most of the assets they own. So, how do they work, and when might you decide to use each of these types of arrangements?
Sales and Leaseback
This type of arrangement involves a business selling one of its assets to another party and then leasing back the asset so it can continue to use it. Many people speak of sale and leaseback being used in respect of property, but it is also possible to do this with a wide range of business equipment, machinery, technology, vehicles, and other assets.
In the right circumstances, sale and leaseback can be massive ‘win-wins for both parties. The buyer usually acquires an asset at a lower price than market value and continues to receive lease payments in the long term. The seller is able to quickly generate a significant amount of capital while continuing to have full use of the asset. Businesses usually enter into sale and leaseback arrangements for properties or assets that they both own and use on a regular basis and once the sale has been completed, they continue to make full use of the property or asset in much the same way as before. This is especially true given that some sale and leaseback transactions involve longer lease terms of around 20 to 30 years, and it may also be possible to negotiate an extension of the lease, so the seller can still plan to use the asset in the longer term.
Advantages and Disadvantages
One of the biggest advantages of sale and leaseback arrangements is that all rental payments are fully tax-deductible.
They are perhaps best suited to businesses with a strong trading history and favourable financial circumstances, and they are therefore most likely to receive a larger offer for the asset. They can also be a very attractive option for businesses that might struggle to obtain a traditional loan.
A sale and leaseback transaction is not a debt financing arrangement, so the selling company can raise a potentially significant sum without needing to borrow.
However, the biggest disadvantage of entering into this form of arrangement is that the selling company will no longer be able to benefit from future increases in the asset’s value. The seller must also be confident that they can afford the rental payments.
Sale and leaseback are frequently used by both small and large businesses.
Asset Refinance
Asset refinancing also involves the use of an asset that the business already owns. However, unlike sale and leaseback, this is definitely a finance arrangement, with the business lending a sum of money against a specific business asset.
This form of financing can be used to access anything from, say, £5,000 to £50 million. A typical maximum loan term might be 10 years, although this will depend on the asset’s working life – the lender will want to know the age of the asset and whether it’s in good condition before deciding what loan term they can offer, so, for example, it’s unlikely you will get a 10-year repayment term if the asset is an outdated piece of equipment that might only last five more years.
What about interest rates?
A typical interest rate might be between 6% and 9% per year. The rate is likely to be fixed throughout the term.
It is similar to a sale and leaseback in one sense, in that you will surrender ownership of the asset. However, while a sale under a leaseback agreement is a permanent arrangement, in this case, the finance company will only be the legal owner of the asset for as long as it takes you to pay the loan back. Once you have fully repaid the amount owed, ownership reverts to you once again. Asset refinancing might be said to be a temporary sale and leaseback arrangement.
You can continue to use the asset in the normal way for the duration of the loan term, even though you won’t own it for that period of time.
Even though you won’t be the legal owner during the period covered by the refinancing, the lender will still expect you to maintain and ensure the asset and pay the costs involved in doing so.
You don’t have to own 100% of the asset to make use of asset refinancing. Lenders will still consider your application if you only partially own the asset under a hire purchase agreement or similar arrangement, although in these circumstances you will only be able to get a loan for a smaller percentage of the asset’s value. If you own the asset outright, you may be able to borrow 100% of the asset’s value.
Funds raised via asset refinance can be used for almost any purpose, including boosting cash flow, paying bills, or purchasing new equipment.
Small and large companies alike frequently make use of the sale and leaseback procedures. Refinancing a company’s existing assets is another option for doing so. But unlike a sale and leaseback, a business lends money against a specific business asset in this arrangement. Asset Many companies use refinancing to help them free up cash equity from their existing assets, and it comes in three forms: asset-backed loans, sale, hire purchase back, or sale and leaseback deals. In all cases, a lender purchases your assets and then lends them back to your company.
Small businesses, many of which have already financed all of their available assets, are particularly fond of refinancing their existing debt. It’s also possible to use asset refinancing to get out from under a loan with an excessively high-interest rate and poor terms. We can renegotiate your current loan terms with your current lender to better suit your needs. An alternative to traditional bank financing is Sale and leaseback (investment loans, real estate loans). One of the company’s assets (such as machinery or real estate) is sold to a leasing company by the entrepreneur. The fixed asset can be an existing one or a new one. As a result of this sale and subsequent leaseback, the enterprise pays a fixed monthly rental fee for the asset.
To find out more about both asset refinance and sales and leaseback, along with more asset finance options; get in touch with the team at Funding Bay.
