Sale and leaseback financing is a way for companies to access capital by selling assets they already own, like equipment or property, and then leasing them back long-term. This frees up cash while allowing continued use of the assets.
How Sale and Leaseback Works
- Company A owns manufacturing equipment worth $1 million
- Company A sells the equipment to Company B for $1 million in cash
- Company A then leases the equipment back from Company B for 5 years, paying monthly lease payments
- Company A gets an influx of $1 million cash but still retains use of the equipment
- Access to capital – The sale provides a lump sum of cash for any business needs.
- Retain asset use – The leaseback allows uninterrupted, continued use of the sold equipment.
- Tax advantages – Lease payments may be tax deductible, and some tax obligations on sale gains can be deferred.
- Improved financial ratios – Converts fixed assets into cash, improving liquidity ratios.
- Flexible terms – Leaseback period can be customized based on need (e.g. 36, 48, or 60 months).
- Potentially higher effective cost over time versus traditional financing.
- Risk of not qualifying for a new lease after the term if credit conditions decline.
- Loss of ownership rights and potential obsolescence of sold assets.
Overall, sale and leasebacks allow access to capital while retaining the productive use of assets. For equipment-intensive businesses, it can provide an alternative financing option worth exploring.