How to Access the Hidden Cash in Your Business

Small-business owners may have money trapped needlessly inside their companies. Forget getting a loan; free the cash you already have.
President, Proximo, LLC
June 20, 2013

Over time businesses can acquire a significant number of valuable assets: manufacturing equipment, transportation equipment, vehicles, office buildings, industrial real estate, retail stores—the list goes on. Even a business with less than $10 million in revenues could easily amass $5 million or more in assets. In most cases, the businesses buy the assets because they serve as the means to an end; you buy a retail store so you have somewhere to sell your inventory; you buy a fleet of trucks because you need them to execute customer deliveries. Businesses don’t buy these assets because they want to own them or see them as good long-term investments. If your business needs cash, selling these assets and leasing them back from the buyers gives you the best of both worlds: You get to use what you need without owning it.

Welcome to the world of "sale leasebacks."

A sale leaseback transaction is a relatively straightforward way to extract the trapped value in your hard assets. Your company sells certain assets to a buyer (typically a financial institution that specializes in these transactions), which immediately leases it back to you. When executed properly, it’s a win-win situation.

As the seller, you:

  • Retain the rights to use the building, equipment, vehicles, etc., through the lease agreement.
  • Are paid 100 percent of the market value of the assets, providing a bundle of cash that you can reinvest in growth opportunities for your business like marketing, sales or acquisitions.
  • Avoid the hassles and low approval rates of bank loans.
  • Eliminate the need to sell equity to investors for capital, which dilutes your ownership and weakens your control.
  • Are required to make periodic lease payments to the buyer who is now also the lessor.

RELATED: Can Your Landlord Destroy Your Business

The lease payment is calculated based on the value of the assets, its useful life and the financial condition of your company and market rates for leasing. This means that in today’s market, you can think of the lease payments as being equivalent to a borrowing rate of 5.75 to 9.5 percent.

For tax purposes, this type of transaction also provides additional benefits. You can deduct the lease payments as expenses, which lowers your tax liability. The benefit is usually greater than the tax benefit from depreciation when you owned the asset.

For accounting purposes, you can avoid loading up your balance sheet with debt, as you would with a loan, if the lease is structured in such a way that it is considered an operating lease and not a capital lease. This means you only need to expense your lease payments as you would any other expense. To make sure your lease is an operating lease, accounting rules require that the life of the lease be less than 75 percent of the useful life of the asset.

RELATED: Borrow Your Way to a Lower Tax Bill

The counterparty to the transaction, the buyer, agrees to a sale leaseback for several reasons:

  • It has cash that it needs to invest in a stable, secure investment.
  • It receives periodic, steady payments over the long term.
  • The return it earns is higher than other alternatives.

Since the financial crisis of 2008, sale leaseback transactions took a hit as real estate prices plummeted and sellers didn’t want to enter into these transactions at a low price. But as of late last year, the market is picking up again for both real estate and non-real estate assets. It’s an alternative financing solution that makes sense for many businesses. Consult your financial advisor to determine if this is a viable option for you.

Read more about small-business finance.

Photos from top: Thinkstock, iStockphoto