What is Sales Leaseback?

Using Your Own Assets To Fund Your Business

Sales leasebacks (short for “sale-and-leaseback”) are most often used in dealing with real estate. However, many small business owners have used this type of financial transaction to help provide small business capital for their company. It shares some similarity to equipment leasing in that the business leases the equipment it needs, but the comparison ends there.

Simply put, a sales leaseback involves the sale of an asset by a company to a bank or another financial institution, who then in turn leases the asset back to the company. The asset must be fully owned and free of any additional obligations. The terms of the lease are typically 15 years or more. If a business has fixed assets such as corporate real estate, that property can be sold and then leased, and the proceeds may be used to generate small business capital to pay down debt, purchase needed materials, or even to finance the growth of your company.

Sales leaseback enables a company to become more financially flexible as it frees up cash, providing immediate profits from the sale while keeping possession and use of the asset In the case of property, a leaseback gives the company the ability to continue business without interruption and to negotiate renewal terms. A business may also benefit from additional tax deductions through a leaseback deal.

Due to the nature of a sales leaseback, there are differences in how gains are recognized. For example, under Generally Accepted Accounting Principles (GAAP), certain standards on accounting for leases apply to sales leasebacks. According to the Financial Accounting Standards Board (FASB), if a lease were capitalized, then the business would defer any gains made on the sale. Under the FASB, gains made on the leaseback should be amortized over the life of the lease. Under International Accounting Standards (IAS), gains are recognized immediately if, for accounting purposes, the transaction is handled as an operating lease.

Understanding how to properly account for sales leasebacks, as well as finding a bank or financial institution that handles this form of off-balance sheet financing, can be a complicated process. Before entering into a sales leaseback agreement, there are a number of pros and cons you should consider:

Pros Of Sales Leaseback

  • Sales leaseback financing can help you to unlock much needed small business capital, allowing a company to make investments in new business opportunities
  • Capital obtained through a leaseback generally has longer terms than other debt sources.
  • Depending on the bank or financial institution, the cost of a leaseback can be comparable to debt financing.
  • A company may be able to write off their total lease payment as an expense for tax purposes.
  • Leasebacks can be cheaper than the cost of equity.
  • At the end of the lease period, the company may have the option to renew the lease, purchase the asset back, or terminate the relationship.

Cons Of Sales Leaseback

  • If you’re using real estate in a leaseback, you may see a loss in the residual property value over time.
  • Should the leaseback agreement not have a renewal option, your business might be disrupted through the loss of equipment or possible relocation.
  • A business might be locked into higher rental payments on a property should the market rate decrease during the term of the leaseback.
  • The accounting principles of sales leasebacks need to be followed exactly in order to get the full benefit of selling and then leasing the real estate or equipment.

Since 1999 AmOne has helped over one million businesses obtain the small business capital needed for success. Our process has been specifically designed to save small business owners like you the time you need to focus on growing your business. Our service and expertise are free and you are never under any obligation to move forward. To find out what kind of business financing option is right for your business, call us toll-free at 1-800-781-5187. Our service is free of charge. You can also complete our simple small business loan form.