How A Sale Leaseback Can Benefit Businesses
Leasebacks in Focus
Leasebacks are agreements where sellers of assets lease assets back from buyers. With leaseback arrangements, the arrangement details, like the duration of leases and lease payments, are decided straight after the asset sale. Basically, the asset sellers become the lessees, and the buyers become the lessors.
The way a Leaseback Works
Typically, companies need to grow their capital. This capital is acquired by equity and/or debt financing. While both of these methods can be effective, they can also result in problems if not managed correctly. Debts have to be repaid and are recorded on company balance sheets as debts. Equity doesn't have to be repaid, however it is acquired in exchange for ownership. Leasebacks enable this to occur.
Companies that have expensive assets, or builders, use sale leaseback arrangements more than anyone else. Leaseback arrangements are helpful when companies need the money invested in assets for other investment purposes, even though the assets are required for them to operate properly.
In addition, leaseback arrangements can offer sellers extra tax breaks. Lessors benefit in that they receive guaranteed leases, with reliable payments over a specified time period.
Equity Doesn't Have to be Repaid, However it is Acquired in Exchange for Ownershipperspective, they are not typically classed as financing. As a result, they don't feature on balance sheets. For this reason, many analysts put capitalized leases in with long term debts, when calculating the debt obligations of companies.
A leaseback, or sale leaseback as it is sometimes called, is not equity or debt. Actually, it is best described as a hybrid financial product. Under these arrangements, companies do not increase their debt obligations, but gain access to funds via asset sales.
This could be likened to a pawn shop that is specially designed for corporations. Companies could visit this shop and receive a certain quantity of funds, in return for their valuable assets. Unlike the customers of normal pawn shops though, companies would not be expected to buy their assets back in many cases.