cash and CARRY
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Transport is a capital intensive industry. A company with most of its money tied up in trucks, trailers and property could be asset rich, but unable to find money for expansion. Sale and leaseback could be the answer...
Hauliers sometimes need to raise capital in a hurry and one straightforward way of doing this is a sale and leaseback deal. The idea is simple: sell your assets to a leasing company, which then leases them back to you. Capital is raised instantly: in return you pay rental for the length of the contract.
The company retains the use of the assets, which would not be the case if you sold them.
Surveyors
Most long-term assets can be used in sale and leaseback transactions. A number of firms offer financing for commercial vehicle fleets; estate agents or surveyors might be able to advise on sale and leaseback of properties to a real estate investment company Where the value of these is substantial compared with the firm's other assets this could be a smart move.
Sale and leaseback can be pretty tax-efficient. That's particularly the case for company cars, but tax treatment of ovimed and leased CVs also gives a slight advantage to the company which decides to lease.
Rental payments are fully taxdeductible on leased assets; it is the leasing company, not the operator, which has to claim capital allowances. However, the position on VAT may be less clear. Any haulier considering this type of transaction should take advice from a tax expert before deciding to go ahead, because mistakes can be costly Sale and leaseback hits the headlines when a major company decides to lease its fleet, but it's equally applicable right down the size scale to owner-drivers.
David Liebling, head of corporate communication at Lex, says: "We will take one vehicle— there's no lower limit." There are no age limits either, though he points out that it's difficult to give guidelines because so much depends on specifics such as the vehicle's specification, maintenance history and usage.
Most leasing contracts on CVs run from three to five years, so it's best suited for funding expansion in the medium term.
Because of the relatively long period, it is not the best answer for companies which require the cash to get over a temporary cashflow problem—an overdraft would be a better solution, if the company believes it could be paid off in the near future. Its also not an advisable way forward for companies which are in difficulty as they have to be able to commit to meeting the rental payments.
Nor is a sale and leaseback particularly flexible. It is written for a fixed period, at the end of which the leasing company takes possession of the assets and is responsible for disposing of them. A company cannot change its mind and buy the assets back again without paying a substantial price for the termination of the contract.
Liebling suggests that a buyback clause could be negotiated and written into the contract, but it is not usual.
flexibility
And once the sale and leaseback has been concluded, because the company does not own the assets it can't just sell a truck to raise money if the market turns down. For this reason many firms lease part of the fleet but retain ownership of other assets for greater flexibility.
Some customers, on reaching the end of the first lease period, decide to extend the contract, and this can be done easily But Liebling reports that most prefer to lease new assets and rejuvenate their fleets instead.
Sale and leaseback for property will usually run over a longer period. Any haulier contemplating this route should remember that any increase in the value of the property will only be of benefit to the finance company, and that could be a considerable price to pay if the property market keeps rising.
The advantages of raising extra capital need to be considered carefully against the potential loss of revaluation surpluses. In the end that comes down to whether the haulier believes the returns on the expansion that can be financed through the sale and leaseback will be higher than rising property prices in the long term.
Despite its potential problems, sale and leaseback is a tried and tested method of financing assethungry businesses over the medium term. For any company which is finding that finance is a constraint on its expansion plans, this avenue is certainly worth considering.
• by Andrea Erick% Lex brand manager.