What Are The Advantages of Sale Leaseback Equipment Financing In Canada? Are There Alternatives?

Updated: March 06, 2011

Sale leaseback equipment financing often comes up as a profitable solution when firms are challenged by working capital and cash flow needs and requirements. The reality is that if you structure this type of financing properly it's the ultimate business financing solution to a temporary business challenge.

It is not secret that the sale and leasing back of business assets becomes more popular when economic times are 'tight'. The strategy is many times a positive and good decision, because you are freeing up cash that is sitting in fixed assets that are not utilizing their maximum earning power for your business.

Let's not also forget that your balance sheet also improves at the same time because your overall debt to tangible net worth improves when utilizing a sale leaseback financing, and your write off (depreciation) and financing costs are also lowered at the same time! That's a solid one two punch of good business news to any business owner.

In some ways this method of business re financing is an alternative and creative strategy. What your firm does with that additional capital is of course your decision - it can be used for general working capital purposes, a down payment on new and required assets, or to retire additional debt or loans that you might be carrying on your balance sheet. If you can use the new freed up capital to increase revenues and profits that is simply an additional benefit.

We caution clients to look at two key areas in this type of transaction. It is critical to maximize the value of the transaction, so more often than not a qualified appraisal of the asset has true value for the business owner, and should not be considered a wasted expense.

Remember also that most lenders when financing a sale leaseback transaction financing what is known as a percentage of loan to value. An example might be that if an asset is appraised at 200,000.00 the lender might as a policy loan 60% of that value, so your ability to increase the value of the asset via a qualified appraisal provides additional working capital to you and of course comfort to the lessor or lender. Rates are the second item to investigate, as you want to ensure you receive a market rate for this type of financing, which typically carries a premium to new equipment financing.

Is there an alternative to a sale leaseback equpment financing transaction? One of our favorites is a short term bridge loan on the asset. In this transaction you are not locked into a longer fixed term that often comes with sale lease back financing, and you have the option to often pre pay or temporarily renew the bridge loan on an annual basis. Bottom line, a very viable alternative.

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