Sale and leaseback – could it be the answer to your liquidity issues?
Although the UK economy has seen steady growth in recent months, for many companies finding the funds to invest in key areas of their business or to fund expansion can be a real issue. One answer could be the sale and leaseback of the vehicle fleet.
While economic recovery now seems generally to be taken for granted, and with many sectors of the economy reporting better trading conditions, there are still many companies finding that bank lending is no longer as easy to come by as it once was, and that they are facing cash-flow issues.
Lines of credit, once taken for granted, may have begun to dry up or payment periods extended, increasing the financial pressures that many companies face.
However, one way of releasing vital funds at such a time is to make company-owned assets work to your advantage, and one such asset is the company-owned vehicle fleet.
For companies that own their vehicles outright, a sale and leaseback can provide the means to free up cash within the business to re-invest in essential, core activities or to fuel expansion.
Under a sale and leaseback agreement, the company selling the fleet agrees a realistic market value with the buyer – typically a leasing company.
On the sale, ownership passes to the buyer, who promptly leases the existing vehicles back to the customer, usually via a contract hire agreement based on mileage, duration of the term and the estimated future value of the vehicles.
This can also include a fixed cost maintenance package to iron out any peaks and troughs in maintenance expenditure and provide peace of mind for the seller. Alternatively, a pay-on-use maintenance scheme can be introduced, along with a host of other fleet management services.
Once the sale has been agreed, this provides an immediate cash injection to the business with no future risk on the sale of the vehicles or a concern about their second-hand value.
And, as this is a paper-only transaction, the seller continues to have use of the vehicles throughout the transfer process and there is no driver inconvenience or disruption.
When new vehicles are added to the fleet as the existing ones reach the end of their pre-agreed working lives, they can be leased rather than outright purchased so that the risk on their disposal remains with the supplying leasing company.
One advantage of this arrangement is that it removes heavily depreciating assets from the company balance sheet, and helps improve key accounting ratios, so that securing credit going forward may actually become easier. And, by switching to leasing rather than purchasing the vehicles, budgeting becomes more straightforward as all costs are incurred on a monthly basis, and have a known value without any hidden or unexpected surprises.
Benefits of a sale and leaseback
- A cash injection to the business enabling money to be invested in core activities or fund expansion
- The removal of heavily depreciating assets from a company’s balance sheet, with protection from future residual value risk
- Improvement in key business ratios such as return on capital employed (ROCE) and gearing, the ratio of debt to equity
- Budgeting is straightforward as companies pay one fully inclusive monthly fee
- Delivers cost, time and administrative savings
- Instant access to maintenance savings delivered by the leasing provider
- Detailed management reporting facilities from day one delivered by the leasing provider
If you would like more details regarding the benefits of a sale and leaseback for your fleet, please get in touch.