The Advantages of Using Leaseback Financing for Working Capital
Leaseback financing allows small business owners to obtain cash by selling a large asset and then leasing it back from the buyer. The cash from the sale constitutes working capital. This plan can be beneficial for businesses because it carries certain tax benefits, it is available for businesses that have bad credit, and it often requires less demanding monthly payments than other loans. If you own high-valued heavy machinery or real estate, this could be the perfect way to get your hands on some capital to jumpstart your small business.
Leaseback financing happens when you, the seller, sell some resource to a buyer. The resource is usually one large component, such as a piece of equipment or real estate (as opposed to several small components of lesser value). At the same time that you sell the commodity, you enter into a lease agreement with the buyer so that you retain usage of the equipment or real estate. This means that you are no longer obligated to pay the taxes associated with owning the good. Also, in some agreements, the lease payments for retaining use of the property can be written off as an operating cost, giving you a distinct tax advantage.
As a small business, you may have been denied loans before because of bad credit. This is not always as much of a concern when you engage in leaseback financing because the investor is relying on your desire to continue using your asset as assurance that you will pay your lease. If loans were tough to come by in the past for your business, a leaseback agreement may be the answer.
When you put a piece of equipment up for sale with the intention of immediately leasing it from the buyer, you are in an advantageous position as far as setting your lease payments. Since you are negotiating terms of sale and terms of a lease at the same time, you have the power to structure the agreement in such a way that the lease payments are much lower than the payments would be for another type of loan. That way, the working capital from the sale is more helpful because the monthly payments are less demanding.
If you are in need of ready cash and you have some large assets, leaseback financing may be the right solution. Enjoy tax benefits, make working capital even if your credit is less than desirable, and negotiate a lease agreement that suits your needs with a leaseback agreement.