When you need to raise working capital, there are a lot of options out there for you, but most of them are based on debt financing. That’s not always a great option, especially if you already depend on financing for cash flow management or you have recently applied for a major asset loan and have not yet rebuilt your cash reserves. That’s when alternatives like the sales leaseback are incredibly useful.
What Is a Leaseback?
You are probably aware that assets accrue equity when you pay off their initial financing, and that means the assets you own outright have equity you could tap. If you wanted, you might be able to refinance some of them to access that equity. A leaseback is an alternative to refinancing where instead of taking on debt, you sell the equipment to an investor and then sign a lease agreement to retain it for use.
This provides you with a lump sum of capital to work with and no strings on how you use it. The equipment you had is still there until the lease is over, and then the financing company is in charge of removing it. Some businesses use the sales leaseback as an end-of-life disposal method for machines even if they do not necessarily need the capital infusion, just to increase cash on hand and eliminate equipment disposal fees.
Advantages of Using Leasebacks
On top of the access to capital without taking on debt and the free equipment disposal, leasebacks also eliminate depreciating assets from your balance sheet to simplify your tax situation. They can be used to raise the capital for upgrades or expansions, too.
Think about it. If you know a machine will need to be upgraded to the next model soon, then a leaseback arrangement could allow you to get the funds needed to finance its replacement without losing the original. This expands your productive capacity, making it easier to finance a second upgraded machine at the end of the lease period and allowing you to expand and upgrade at once, without taking on a lot of extra risks.
Negotiating Leaseback Terms
The biggest advantage of the sales leaseback is probably the leverage it gives you when negotiating the equipment lease. Most of the time, leasing agreements are what the financing company offers because they have a set program. With a leaseback, the investor has the chance to continue profiting from the machine after your lease is over most of the time. This gives you some power at the negotiating table when it comes to costs, maintenance and repair assistance, and other features of your lease. Keep that in mind as you approach your first leaseback deal.