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Tata Capital > Blog > Generic > How Does Sale & Lease Back Work and Benefits Associated with It

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How Does Sale & Lease Back Work and Benefits Associated with It

How Does Sale & Lease Back Work and Benefits Associated with It

Availability of large capital is the key to smooth business operations – be it working capital needs, asset acquisition, business expansion, or funding a new project. However, for businesses with large capital amounts tied up in assets, managing capital requirements can be a hassle. And they might end up looking for alternate sources of funds.

Here, if a business owns a building, machinery, or other assets, it can monetise this asset through a sale and lease back. Sale-leaseback is a reverse fiscal transaction wherein a business sells its asset only to lease it back from the purchaser. It is a feasible solution for businesses looking to free up their capital without losing out on asset use.

What is sale and leaseback?

Essentially, a leaseback – also called a sales-leaseback – is an agreement between two parties where the owner of an asset sells the asset and leases it back from the buyer. The seller agrees to pay a pre-determined lease amount for a fixed lease duration. So, the buyer becomes the lessor, and the owner (the company) becomes the lessee.

Leasebackis a feasible alternative to bank financing and benefits both the buyer and seller. A company usually opts for sale-leaseback when they want to bring capital invested in an asset back into their business while still using it for business operations. As for the buyer, it is an attractive option to earn a good return on their investment, as they can start generating cash flow through regular lease payments.

What are the advantages and disadvantages of sale and leaseback?

Before you enter a leasebackagreement with a buyer, you must consider the various drawbacks and benefits of sales and leaseback.

Advantages

1. Capital inflow

This is perhaps the key reason why companies opt for sales leaseback. It allows the seller to free up capital to meet their working capital needs, expand the business, or invest in other profitable avenues.

2. Cost Savings

With leaseback,companies can save time and costs  by efficiently structuring their lease transactions For example, lease transaction structured as an operating lease will help company to expense out the rentals to be paid under lease. Further depending on the term of lease, outflow towards rentals can also be optimized.

3. Liquidity

Another benefit of sales and leaseback is its ability to improve the business balance sheet. Companies can avoid debt by opting for sales leaseback. Moreover, they can increase their current assets by selling the asset in cash. Thus, improving their capital structure.

Disadvantages

 1. Future appreciation and depreciation

As the seller no longer owns the asset, they will not gain depreciation benefits.

2. Sale of company

If the company is sold in the future, the said asset or property will not be considered a sellable asset and won’t be included in the valuation. As a result, the seller will lose the asset’s value.

3. Requirement of No Objection Certificate

Many time existing assets are encumbered with the lenders. In such cases sale of any assets requires no objection certificate from the financier.

In conclusion

For companies looking to pull back capital into their business, sales leaseback is worth considering. During uncertain times, it can offer capital flexibility and help improve the balance sheet structure.

Looking for affordable equipment financing? Get in touch with Tata Capital to enjoy highly customized loans, excellent leasing solutions, and an easy application process.

Or drop a mail to Leasing@tatacapital.com and our Leasing experts will get in touch with you for further assistance and leasing information.

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