Is a short term sale and lease back agreement the best way to get short term finance for your small business?

A sale and lease back is used by businesses and companies as a way of generating some cash for additional working capital, to fund expansion and growth or to raise some extra money for a specific project. In this financial arrangement the company will sell off a major asset, such as storage space, offices, a large piece of machinery etc. and then lease it back off the new owner.

Many people think that a sale and lease back agreement is a long term arrangement that last many years, however this does not necessarily have to be the case. Historically, these financial arrangements were over many years, however times have changed and short term sale and lease back arrangements are becoming increasingly popular especially in the current economic climate where it is becoming increasingly difficult to get any form of affordable short term finance.

There are times when a business may be denied a short term loan, or the cost of a short term loan is so expensive it is prohibitive. In these circumstances a short term sale and lease back agreement may turn out to be the perfect solution in order to get the cash your business needs.

The short term sale and lease back transaction

A short term sale and lease back arrangement the business may sell the asset and lease it back from the buyer with the intention of buying the asset back in a few years. This arrangement is legally complex and there has to be several clauses in the legal agreement to ensure the new owner cannot sell the asset and to ensure the previous owner of the asset, i.e. your business gets first refusal to buy the asset back etc. etc.

A short term sale and lease back arrangement is more attractive to a lender than a short term loan because the lender gets legal title to the asset rather than simply having a legal charge over the asset. If the repayments are not met the lender can simply take the asset away from the company, although this provision needs to be clearly stated in the sale and lease back agreement.

How do you go about getting finance from a sale and lease back agreement?

If you are looking to raise finance through one of these financial agreements you may be fortunate enough to have a family member or friend who is willing to buy the asset off the business and lease it back. If you do use a friend or a family member you have to remember that financial arrangement is a business transaction and should be treated as such. Both parties must enter in to the finance agreement with their business “head” on and there should be legal contracts in place clearly setting out the terms and conditions of the transaction, as well as the obligations of each party. The legal costs are going to be quite high and to sweeten the deal and make a friend or family member more likely to buy the asset you may wish to consider paying for all the legal costs associated with the sale and lease back contract.

If you do not have a friend or family willing to enter in to a sale and lease back you may be able to find a private investor or business angel willing to buy the asset and then lease it back to the company. When using a private investor or business angel you have very little bargaining power, especially if you have exhausted all other sources of finance.

In the absence of friends, family, a private investor or a business angel the only option left is to use an external finance house. There are several finance companies out there that deals solely in sale and lease back transactions, and short term financial arrangements in particular. These specialist finance companies are going to more expensive than using other sources and the contracts are likely to be much more onerous, but if the business needs the cash and this is the only way to get the cash, the costs have to be sucked up and absorbed.

Dos and don’ts of short term sale and lease back agreements

1) Do your homework first and investigate several sale and lease back companies to ensure you are not getting ripped off.

2) Do make sure there is a clause in the contract to let you buy the asset back in a given time frame. If there is no option to buy the asset back and the lender sells the asset on you may find your business will fold unless you can buy a replacement.

3) Do make sure there is a clause in the contract that stipulates the asset cannot be sold to any third party during the lease back period. If the asset is sold during the lease back period there may be
complications for your business.

4) Do make sure you can have the cash in place, or access to the cash, when the time comes round for the business to buy the asset back.

5) Do make sure you use a good firm of lawyers and preferably one who specialises in sale and lease back agreements. Never scrimp on the legal team as it could prove very costly for the business in the long term.

6) Don’t rush in and accept the first offer. Negotiate with several lenders to ensure the business is getting the best deal.

7) Don’t sign any contracts until you have had an experienced legal team check over the small print.

Is a sale and lease back suitable for your business?

So, is a sale and lease back contract a suitable form of short term finance for your business? The answer to this will depend on a lot of variables. However, with a short term sale and lease back agreement you can offer the lender the ultimate in security, i.e. legal ownership of the asset, and this demonstrates that you, the business owner, are confident the lease payments will be made on time and that the business will have the cash available to buy the asset back at the end of the  period.