Sale and Lease-back

If a firm has already purchased long-term assets, and is experiencing working capital issues, they can sell the asset to a lessor, and lease it back; using the cash injection to improve short-term working capital. 

This strategy 'lightens' the Balance Sheet. Because the business owns less assets outright, it requires less sources of finance via either liabilities or owner's equity. Long-term debt can be reduced and possibly the owners could withdraw some of the equity in the business to place in another asset (shares, term deposit, property investment).

The proceeds from the sale can be used to:

• restore cash balances and liquidity

• pay off short-term debt to restore the Current Ratio and short-term stability

• pay down long-term debt to improve solvency and improve the Debt to Equity ratio

• pay for growth projects, new equipment or new product lines

All of the advantages to leasing are the same as the previous page:

Advantages of leasing are:

• Leasing reduces the impact on capital expenditure (transforming inputs of equipment, technology or premises), resulting in less equity / debt financing and higher levels of working capital. This means you can use cash resources on other growth projects and STILL have use of the asset.

• Leasing is a form of long-term debt, but it is not represented on the Balance Sheet. It is recorded as an ongoing expense on the Income Statement. Leasing does lift expenses and 'reduce' profitability, but the advantages of not needing to source large finance (equity or debt) outweigh this.

• Leasing is an expense and is thus tax deductable. Owning an asset does not provide this advantage (although interest paid on loans is also an expense that is tax deductible, as are other items like depreciation).

• Leasing can vastly increase assets used by firm, lifting productivity and profit. A firm might be able to secure the finance to purchase one factory outright - but it might have the financial capacity to lease THREE factories for the same financial impact. This will drastically increase the productive capacity and profitability of the firm.