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Canadian Sale Leaseback Financing – The Basics

Guest post by: Stan Prokop

Article Overview: The article focuses on the alternatve financing strategy of sale leaseback financing for Canadian business owners .

Canadian Sale Leaseback Financing – The Basics

Sale leaseback financing in Canada is a very robust part of the Canadian Equipment and Lease Financing industry. Many business owners and financial managers in Canadian firms may not yet be aware of the wide popularity and increasing use of this type of alternative financing facility. For various economic and financial reporting considerations this finance strategy continues to be scrutinized as a financial option for Canadian business.

The overall sale leaseback strategy has been around for a very long time, and, as noted, gains in popularity. The primary reasons for its increasing usage are the ability of business owners to enhance their profits to a certain degree, as well as to generate additional cash flow for the business. The latter would appear to be the most common current factor in sale leaseback popularity.

Business people continually look for 'creative 'solutions to financial and cash flow challenges.

So lets recap the basic strategy - Your firm has equipment that has been fully paid for an is currently unencumbered collateral. Your interests are simply, you wish to sell the equipment, but at the same time you wish to continue to use the asset. Naturally the asset base of consideration for such strategies involves a broad number of industries and an even broader number of assets. More often than not need is very basic - how can you leverage assets to bring more cash into the firm? In certain cases, if a transaction is managed properly you can enhance you overall financial statement ratios .

So how does it work - it's kind of simple, you 'sell 'the equipment back to a finance or leasing company. Under the umbrella of equipment financing and lease documentation your firm 'leases the asset back 'from the finance firm.

There are of course some key accounting issues that Canadian business owners and financial mangers have to take into consideration. Based on the value of the transaction your firm may have to book either a gain or loss on the transaction. As most assets depreciate in value more often than not you may be required to book some sort of a loss on the transaction

What are some of the other motivations for considering such a strategy? We can broadly group them into a couple of categories - i.e. Cash flow, accounting and tax, and balance sheet and income statement enhancement.

If your firm structures the transaction as a true operating lease when you enter into the sale leaseback you have somewhat m magically taken debt off your balance sheet and improved many of your key operating and loan covenants . The payments on this transaction create a monthly expense and this amount more often than not is less than the deprecation taken on the asset, so, via the magic of accounting your firm has created additional earnings! In cases where you do in fact have a 'gain' on the sale leaseback those also of course add to the profits of your firm. We love those accountants, right?!

In summary, Canadian business owners and financial managers should investigate the strategy of a sale leaseback of assets, in the current economic environment such a strategy can enhance your firms overall liquidity and profitability. That's a good thing.

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Article Tags: canadian business, cash flow challenges, sale leaseback financing in Canada



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