Sale and Leaseback finance leasing

Sale and leaseback finances allow businesses to raise capital by selling back assets that they own to a funder or bank, in return for cash. The funder then leases the asset back to the company over an agreed period.

IT equipment is one of the fastest depreciating assets that a business owns. As a result, many small businesses now prefer to lease their IT equipment to reduce risk and keep their cash flow healthy.

If, for example, you have bought IT equipment, you can sell it back to a leasing provider such as CHG-MERIDIAN, and receive a cash sum. However, if you still need to use the IT equipment within your business, you can lease it back.

Most commonly used by businesses with lots of expensive equipment, sale and leaseback can be an attractive method of raising capital. While a loan would show up on a company’s balance sheet as a debt, a leaseback transaction can actually help improve the balance sheet, bringing the liability down and increasing the current assets.

Once the asset has been sold, the business then leases it back from the financing company for an agreed period at a fixed monthly rate. Terms are typically three years, although many finance companies are flexible in line with the business’ needs.

This type of financing allows businesses to unlock the capital value of their assets. Not only this, but they get access to funds, typically at a much more favourable rate than normal borrowing.

Sale and leaseback is a financing strategy to consider for companies with valuable assets who are looking to free up capital and generate a cash injection, without giving up access to their assets totally.

This type of financing can also be a good option for businesses unable to access credit through traditional providers, such as banks, as it allows the business to unlock capital without raising secured debt.

If your business needs to improve cash flow in order to expand, whether that’s developing a new product, growing the team or buying a new site, then sale and leaseback could be the ideal solution. Equally, if you have outstanding loans on IT equipment and you want to lower your overall debt, sale and leaseback can be beneficial.

Of course, as with any financing solution, it’s important to keep in mind that not all businesses will qualify for sale and leaseback. The financing company will assess the liquidation value of the equipment. It’s also best to consider all available options before settling on any financial decision that affects the business, including speaking to an independent party.

Almost all IT equipment is suitable for sale and leaseback. However, this type of financing may offer more benefits for certain assets.

Desktops and laptops are well suited to sale and leaseback as they can be widely reused. However, IT hardware infrastructure, networks, and servers are all suitable too. 

Assets used to back this type of finance are usually fixed assets, including healthcare and IT equipment:

• Printers
• Desktops
• PCs
• Laptops
• Tablets
• Mobile phones
• Forklift trucks
• Robotics
• MRI machines
• PET and CT scanners
• X-Ray machines
• Ultrasounds

There are two main conditions any company must meet to qualify for sales and leaseback financing which are:

• The company must own any equipment outright. The equipment must not have any liens and should either be completely paid off or extremely close to being paid off.
• The equipment in question must have a resale or auction value. If the equipment does not have a fair market value then a company is unlikely to find a financing partner willing to purchase it.

Entering a sale and leaseback agreement offers several benefits such as the seller being able to quickly generate working capital while maintaining full use of the asset. There is also zero disruption to the business, as you continue to retain all the usage benefits, and transfer the risk of ownership and disposal to the funder.  

The other benefits of sale and leaseback include:

Whereas traditional loans don’t usually cover the full cost of the investment, sales and leaseback financing typically covers 100% of the investment cost.

By selling the asset, sale and leaseback allows the business to generate cash, creating an additional capital budget based on currently-owned assets. This not only removes the risks of ownership assets but can also help to accelerate future projects.

With sale and leaseback, you’ll be able to access the asset after the sale. This means you’ll have access to a cash injection while retaining the full value of the asset without disruption to your business operations.

Sale and leaseback contracts usually offer a high level of flexibility, meaning terms such as the length of the contract can be negotiated in line with the seller’s needs.

A sale and leaseback finance agreement match the useful lifecycle of the asset. And once the contract is up, the asset can either be returned or renewed.

All rental payments made under a sale and leaseback finance approach are fully tax-deductible.

The sale and leaseback of assets remove an element of risk for the business. When you sell your assets, you effectively hand over responsibility for them to the buyer and they take on the risk.

Of course, as with any financing model, sale and leaseback can also raise some potential disadvantages.

The main disadvantage to consider is whether your company will lose out by giving up the asset. While you’ll still be able to access it for the duration of the agreement, you will no longer own it. This is particularly important to keep in mind with any assets that have the potential to increase in value over time or those that were owned outright without any debt attached to them.

Other disadvantages include:

• Because the lease is secured by the equipment, if you default on your monthly payments, you risk the equipment being repossessed.
• The financing company usually values the equipment at its cost or Net Book Value, meaning you may receive less than what you initially paid for it.
• The financing company will have full control of the assets.

We can offer your business a sale and leaseback solution on a wide variety of assets. Our sale and leaseback process is non-disruptive and enables you to remove complexity and accelerate future opportunities.

If the equipment is less than four months old, we can pay you the original purchase price. If it’s older than four months, we will offer you the net book value of the assets.

You’ll also benefit from our end of lifecycle services including certified data erasure, which will help your GDPR responsibility.

For more information or to discuss our sale and leaseback solution and how it can maximise the value of your existing technology in more detail, please contact us.