Leaseback financing is a creative way for companies to access capital tied up in owned equipment or property. The business sells the assets to another party, then leases them back for continued use. This converts fixed assets into usable cash.
How a Leaseback Works
- Company A owns a warehouse property worth $2 million
- Company A sells the warehouse to Company B for $2 million
- Company A leases the warehouse back from Company B for 10 years at $20,000 per month
This provides Company A with an immediate $2 million cash infusion while retaining use of the warehouse. Company B earns income from the lease payments.
Key Benefits of Leaseback Agreements
- Access to capital – The asset sale generates a lump sum of cash for any business purpose.
- Maintain use – The leaseback allows uninterrupted, ongoing use of the sold asset.
- Tax advantages – Lease payments may qualify as tax-deductible expenses.
- Preserve bank lines – Leasebacks provide financing without using bank credit lines.
- Easy process – Simply structured agreements and approvals versus complex loans.
- Flexible terms – Lease duration can be customized to needs (3-10 years typical).
Considerations
- Higher effective long-term costs than conventional financing.
- Loss of asset ownership and potential obsolescence.
- Risk of not qualifying for a future lease once term expires.
For companies rich in fixed assets, leasebacks can be an efficient way to tap into a source of capital while retaining use of revenue-generating property. The increased financial flexibility makes it an option worth considering.