Cash Flow From Assets Is Also Known As The Firm Is it Advisable to Consider Sale-Leaseback Financing?

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Is it Advisable to Consider Sale-Leaseback Financing?

Many business owners and financial managers are often faced with the thought of using a sale-leaseback to generate cash. This strategy has become much more popular in the last year or so as banking and credit liquidity scenarios have deteriorated.

The overall strategy can be seen as providing a certain operational flexibility to the company. The point of this, of course, is to bring in extra cash for the company at a time when ash is king. The customer, of course, is essentially ‘leveraging the capital’ that the company has built up in the asset. What is this remedy?

Typically, the assets paid for in a leaseback sale are manufacturing equipment, computers, and even business real estate.

A leaseback sale must make sense for both the landlord and the tenant. We believe that the biggest “negative” aspect of such a transaction is the potential perception by the lessor or other lenders that the company is “cashing in” one last time. As stated above, there must be an agreement for the transaction to work for both parties.

By analyzing a typical example transaction, we hope to get a better sense of why this strategy can actually be a common sense financing alternative. Company A has production assets that are shown in the balance sheet as fixed assets. In a sale-leaseback scenario, of course, the assets stay with the business – they don’t move. The company receives cash for selling the asset to the leasing company. Quite frankly, customers considering this transaction have by this point explored other traditional options such as looking at additional financing from their bank or other senior lenders. Of course, the equipment is used on a daily basis to further generate sales (and hopefully profit) for the business.

In some cases, a leaseback sale can actually improve a customer’s balance sheet. An additional added flexibility is that the new leaseback financing can actually be used to create additional flexibility at the end of the lease – ie. the customer can regain ownership of the asset if it has economic value, or choose to negotiate the return of the upgrade with the seller or lessor.

In summary, does the asset sale and leaseback make sense? The answer, as we’ve seen, is “yes” if it’s actually done for the right reasons and makes sense for the customer and the lender.

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