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28th July 1994, Page 37
28th July 1994
Page 37
Page 37, 28th July 1994 — Two-way traffic
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Which of the following most accurately describes the problem?

The traditional way for a haulier to finance his operation is by using bank loans and overdrafts. Nowadays bank finance is hard to come by and can be expensive— cheaper alternatives include selling your assets and leasing them back. But tread carefully: if everything goes wrong, a leaseback deal could put your business at risk...

One option available for finance other than the banks is the sale and leaseback of assets. The haulier sells his premises, vehicles or equipment, banks the cash for use in the business, and then rents the assets from the purchaser, normally at a market rent. Customers are unaware that the asset is no longer owned by the business,

In theory, the asset does not even disappear from the seller's balance sheet as the accepted accounting treatment is to capitalise the value of the lease payments and depreciate the resultant "asset" figure over the length of the lease. Whether this works in practice depends on how close the sale price is to the existing balance sheet value of the asset. The lease rentals will be based on the sale price. If that is significantly less than the balance sheet value, capitalising the rental payments will produce a lower figure than the existing balance sheet value.

Advantage

Another advantage is that the lease payments are usually fully deductible for tax purposes in the year of payment (but not for cars with an original list price of more than £12,000), which can give a greater deduction than capital allowances—the entitlement to which passes to the finance company—but will normally be reflected to some degree in the size of the monthly or quarterly rental payment.

There are some snags, however. The sale proceeds will reflect the saleable value of the asset independent of the business, not its value for use in the business. If your assets are comparatively old this is likely to be very low and could well mean recognising in your accounts a loss on sale. This could cause your bank to get fidgety, particularly if it has been assuming that the assets have a significantly greater value than you realise on the sale. The sale also reduces the bank's security, which increases your personal exposure if you have guaranteed the bank overdraft. You can be in deep trouble if things go wrong with the business and you are unable to meet the leasing payments, The leasing company is likely to sell the asset if you fall too far behind with the payments. If the asset is your fleet this will bring the business to an abrupt halt. If you had not arranged a leaseback you would, to a degree at least, be in control of what assets you realise, or might be able to stave off some creditors at least for a time.

If your business is shaky already, sale and leaseback should be looked on as a last resort. In practice you will probably have difficulty in finding a leasing company in any event. They will first look at the viability of your business as their objective is to make money from the rental; not from having to resell the asset. Many leasing companies will also want personal guarantees.

The lease rental payments are a regular commitment as far as your cashflow is concerned, and an expense in your profit and loss account which may be significantly greater than the depreciation charges they replace. Your existing assets do not give rise to a cash outflow—this occurred in the past when you bought the asset and the reduction in profits could have a knock-on effect on the size of your overdraft facility. It will probably also devalue your business if you are contemplating selling it, as prices are usually based on the profits a business generates. Even if it is not, the price you obtain for the assets on a sale of the business as a going concern could well be greater then the amount you obtain from the leasing company.

Sale and leaseback can be attractive for the healthy business which would like to reduce its overdraft (or has been told by its bank to do so) or which wants to expand but is finding difficulty in persuading its bank to increase its overdraft. Considering the reluctance of banks to lend to hauliers it is another approach to raising cash.

Investors

Sale and leaseback of properties has been common for many years. But depressed prices and the high yields currently expected by investors do not make secondary property --which would include a transport depot—an attractive asset to sell and lease back at the present time, even if someone can be found who is prepared to finance it.

Many leasing companies will consider a sale and leaseback of vans and trucks. Sales and leaseback of other assets, particularly assets which have a specialist use in one particular industry, is far less common.

One company that claims to specialise in such finance for the haulage industry is State Securities (0202) 535773. The advantage of using such a specialist is that it is able to put an accurate value on your plant and equipment and know what documentation is needed by transfer title. However, as with all leasing, the best advice is to shop around. Your lease rent is the cost of raising the capital sum. Obtain several quotes and compare them with the rate you are paying your bank.

El by Robert Maas

Robert W Maas is a partner of Blackstone Franks & Co, a City _firm of Chartered Accountants.


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