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Canadian Sale Leaseback Financing – Part 2

Guest post by: Stan Prokop

Article Overview: The article focuses on the alternatve financing strategy of the sale leaseback for Canadian business owners wishing to increase cash flow and enhance financial operating metrics .

Canadian Sale Leaseback Financing – Part 2

In a previous article we discussed the alternative financing concept which more and more Canadian firms are considering, the ' sale leaseback strategy '. We noted the basics of the strategy, that is to say utilizing unencumbered assets in your business to generate additional cash flow and in some cases enhance your financial statement metrics as well as potentially positively having a positive impact on taxation and profit of your firm.

We also provided an overview of the mechanics of the sale leaseback strategy, and also touched on motivations (cash flow and working capital coming back into your firm) as well as some of the optics of the financial statement issues we have referenced above.

Let's talk a bit more about those 'motivations 'for considering the strategy. Your firm is of course in business to earn a profit you're you and your other shareholders. When you take debt of your balance sheet your profits become greater, because they are a larger percentage of your total assets. The arithmetic is quite simple, your earnings divided by your asset base - when assets are taken off your balance sheet by the sale leaseback strategy ( remember, you have sold the equipment to the lease company but of course you still use the asset ) your ROA - known as return on assets is magnified! That's a good thing!

What is another motivator to consider such a transaction? If you have traditional bank lines of credit and term loans, attached to those arrangements are the ' covenants ', or promises you made to the lender with respect to certain rations of debt and operating ability . Many of these ratios 'magically' improve once you have completed your sale leaseback strategy, because debt has gone off your books. If in fact your firm is in the unfortunate situation of being in default of some of those 'covenants 'or promises the issue can be potentially fixed by entering into the sale leaseback. That might allow your firm to secure additional types of loans or debt that you are seeking to grow and improve your business.

We have talked in the past about the two essential types of business equipment financing leasing - capital leases, and operating leases. Operating lease is generally utilized by firms that have a bit more financial sophistication. You don't own the asset, but you are using it for economic benefit. You probably don't ever intend or desire to own the asset. So how does this information relate to our sale leaseback strategy?

When your Canadian business chooses to do a sale leaseback via an operating type lease you lower your lease payments because the finance firm has an ownership percentage invested into the operating lease transaction.

Cash your company receives from a sale leaseback is new cash that you will invest in hopefully other growth opportunities for your firm. In some cases you can now actually refinance old loans at a better rate, which is also financially advantageous.

Remember also that when you do a sale leaseback any technological or obsolescence risk associated with the asset moves from your firm to the lease company. That's additional peace of mind.

In summary, sale leaseback strategies can be very powerful if you are looking for additional cash flow, have balance sheet issues, or concerns about asset obsolescence and replacement. Sale Leaseback financing - Think about it!

Related Articles
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Article Tags: canadian business, cash flow, sale leaseback



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