Sales-Leaseback or Refinance? Choosing Best to Capitalize on Your Commercial Property

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In the economic environment, having a liquid amount of capital is important to ensure the ongoing operations can be maintained and there is a better chance of investment for growth. However, as the interest rate keeps rising, traditional financing is becoming less attractive for companies.

Thus, people are now considering an alternative source of capital, either refinancing or a sales leaseback. In addition, companies involved in real estate properties can consider exploring the sales leaseback method, which will benefit them.

Herein, the company will sell the real estate to an investor for cash, and then they will enter into a long-term lease. There are various advantages that a company can get by opting for this method.

Sales leaseback and asset refinancing are both ways that work best for using the asset to the best. But it would help if you saw what will work best to make the decision easy.

Ultimately, it will depend on the business needs and the situation. However, the guide here provides insights to help you take the right step.

Sales leaseback – What is it?

It is the arrangement wherein the business chooses to sell one of the assets to another party and then leases back the asset so that it will be able to make use of it. Many people consider sales leaseback only for real estate.

Still, you can use a wide range of equipment, machinery, technology, or vehicles in business operations. Therefore, in the current scenario, using sales leaseback is beneficial for both parties.

The buyer will usually acquire the asset at a lower price than the market value. Also, he will be able to continue receiving the least pay for a longer time. In contrast, the seller can generate a significant amount of capital that can be used for business operations.

Generally, businesses enter such arrangements for properties they own and are required to use regularly. Once the sale is closed, they will continue to use the property just as before.

This happens when the sales leaseback transaction involves longer terms of around 20 to 30 years. You can even negotiate an extension of the lease that will allow the seller to plan the use of the asset for a longer term.

A major advantage of the sales leaseback arrangement is that all the rental payments will be tax deductible. They are best suited for businesses with a strong trading history and better financial circumstances. As a result, they will most likely receive a great offer. Besides, the arrangement can be an excellent option for businesses struggling to obtain a traditional loan.

One needs to understand that the sale-leaseback transaction is not debt financing so that the company can raise a potential sum without actually any need for borrowing. But you must know there is also a disadvantage to entering such an arrangement.

Herein, the selling company will need help to get the appreciation advantage from the property. So the seller must be confident that they will be able to pay the rental monthly. Despite all of this, sales leaseback transaction is preferred and used by both small and large businesses.

It will be helpful if you analyze the current business situation and future aspects before deciding to use the arrangement. After all, once you have sold your property, you will be on a rental.

It is essential to see that you are capable of making timely payments of rental monthly. If you find the situation is favorable for you, then go ahead with this arrangement surely will be worth it.

Asset refinancing- What is it?

Asset refinancing means the use of an asset that is owned by the business for generating capital. However, in contrast to the sales leaseback agreement, it is a complete finance arrangement wherein the company will lend a specific amount of money against a business asset.

It can acquire anything between $5000 to $50 million. Typically the loan term year will be ten years. However, it will depend entirely on the working life of the asset, the lender one has considered for the loan, and the age of the asset. Thus, businesses must analyze the essentials before actually finding a lender for the same.

Let’s consider an example wherein you will attain your repayment term when the asset is outdated equipment that will last only five more years. But unfortunately, the lender to protect the financing will not provide you with a longer lease term.

You must know that the interest rate will be between 6% to 9% per annum which will stay fixed throughout its term. No doubt, the agreement is a lot more similar to a sales leaseback in the sense that you will have to surrender the ownership of your property, but herein the terms are for a temporary period.

Herein, you will offer the lender ownership for a temporary period. He will only be the legal owner of the asset as long as you have the time to pay the loan. Once you have fully repaid the amount, the owner will come back to you. The asset refinancing process is temporary.

Even when the ownership has been transferred, you can usually use the asset during the loan term. Herein you will not be the legal owner during this period, but the lender will still expect you to maintain and guarantee the asset is in good condition while you make the loan amount payments on time.

You can own less than 100% of the asset for the refinancing purpose. However, the lender can still consider your application if only you hold the partial part of the asset under a higher purchase agreement or anything similar.

But remember, in this circumstance, you only will be able to get the loan for a smaller percentage of the value of your asset. In contrast, if you own the buy outright, you can get a 100% loan for the asset value.

The funding you will raise through asset refinancing will be used for various purposes, including boosting cash flow, purchasing new equipment, etc.

All the small and large companies are using the sales leaseback process quite commonly, but refinancing the company’s existing assets is a great option.

After all, the business can get the money without selling the property—the appraisal of which in the future will bring significant advantages.

Companies prefer asset refinancing to free the cash equity from the existing asset. In all cases, the lender has to purchase your support and then lease it back to your company. The small businesses already have refinanced the assets. It is a popular form of refinancing that helps use existing equity. It is possible to use asset refinancing to take yourself out of debt with higher interest rates and poor terms.

You can renegotiate the current loan terms with the lender to better suit your needs. Besides, if there is no other option, then considering sales leaseback will be the best.

However, it is also vital that you find yourself the right lender or buyer for the situation. It would help if you saw that the person is ready to pay you a good amount for your property and will also ensure you have a leisurely experience getting the best of the deal.

Things will be a bit complicated during both processes, but you can make the right decision with proper research. Just remember to consider your current situation in the business and then decide what will work best for the company.

Conclusion

When there is a capital need in the business, there are different ways the owner can consider getting the funding. It can either be a sales leaseback or an asset refinancing option.

But the decision will depend on the business’s specific needs and the situation. Research here is fundamental to deciding the best. Consider contacting Private Capital Investors if you need professional support. They have certified professionals.

They will sit with you to understand your specific needs and advise you about the best. No matter you are a need of financing or just some advice, the experts will be there to ensure you have the best experience getting all the assistance required.

Want to learn more? Get in touch with us today.

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