A business can use different methods to obtain funds. The first thing that comes to mind is probably a business loan. But since your company has equipment and assets, there's a potentially more efficient approach to raising business funds.
If you're accustomed to generating a higher rate of return than your equipment and fleet investment, then a sale-leaseback agreement can benefit your business.
What Is a Sale-Leaseback?
Essentially, this is an agreement in which the entity selling an asset can lease back that item from the new owner. The details of this agreement, like the lease duration and payments, are created immediately after selling the asset. A sale-leaseback transaction typically makes the asset seller the lessee while the buyer becomes the lessor.
This is among the most effective ways to raise capital. The fact that you can lease the equipment back from the new owner allows you to get the money and asset necessary for business success.
Potential Benefits of a Sale-Leaseback
The primary attraction to sale-leaseback agreements is the ability to raise capital and still have your vital assets. But this financial transaction also comes with additional benefits, including the following:
Added Financial Value
This is the most crucial benefit of a sale-leaseback arrangement: freeing up the capital you need. Can your business use supplementary financial resources to boost efficiency and revenue growth? A sale leaseback can be perfect for you. By selling your assets, you'll access financial resources you couldn't access initially.
Creditworthiness and Liquidity
A sale-leaseback transaction raises the ratio between your fixed and current assets. This way, your company can take care of any short-term debts. Also, replacing your fixed assets with current assets, in this case, the sale's cash proceeds, can straighten your company's balance with capital and generate liquidity. Therefore, the transaction increases your company's financial health.
Your company also enjoys tax benefits from the sale-leaseback because rental payments fall in the tax-deductible category.
A sale-leaseback agreement lets you maintain control over your asset even if you no longer own it. So it allows you to dispose of non-strategic assets and continue utilizing them until you can afford better equipment.
Focus On Core Business and Growth
When you can no longer access the financial resources you need, a sale-leaseback can come through to ensure continued growth. After all, capital helps you pay workers and suppliers or build inventory. Therefore, the agreement lets you focus on growing your core business.
Selling your assets to free up capital to improve your operations isn't something you'd want the outside world to know. Fortunately, a sale-leaseback agreement always guarantees discretion.
Potential Drawbacks to A Sale-Leaseback
So far, you've familiarized yourself with the benefits of sale-leaseback arrangements. But like any other business dealing, you're likely to encounter some drawbacks, including the following:
- Once the lease ends, you must negotiate an extension. But the new amount could be higher than what you're currently paying. If you disagree, you may have to surrender your assets.
- A sale-leaseback strips you of complete control over the asset. The new owner must approve any modifications or remodeling, which can limit you.
- You may end up paying more than the asset's fair rent. The asset's price might depreciate, but you'll continue honoring the original contract amount even if it's way beyond the actual worth.
All that said, these are possible drawbacks and may not qualify as deal breakers. Clearly, the pros outweigh the cons.
It's Time to Get the Most from Your Leaseback Fleet
A sale-leaseback decision aims to provide financial flexibility to boost operations, improve productivity, and foster business growth. Thus, you'll want to maximize the available assets. After all, you're paying to use them.
Wilmar can help you achieve just that. Our experienced team members know what you need to optimize your fleet and can manage the details of your assets so you can focus on core business. Call us today so we can schedule a free fleet analysis.