Technical Papers Blog

Improving Liquidity Through Sale-And-Leaseback

Improving Liquidity Through Sale-And-Leaseback

3/20/2017

As organizations approach their fiscal year-end, accounting and finance professionals begin to analyze their company's year-end filancial position. In any economic environment, a company's cash position is often an important financial consideration. By demonstrating a strong cash position, organizations can maintain debt ratings, avoid bank covenant violations, and improve liquidity ratios. In the final months of a company's fiscal year, executing a sale-and-leaseback transaction on recent equipment acquisitions is often considered.

WHAT IS A SALE-AND-LEASEBACK?

In an equipment sale-and-leaseback, the lessor reimburses the lessee for equipment that was purchased during the past 6-12 months. Items typicalty included in a sale-and-leaseback are computer equipment, telephone systems, networking infrastructure, printers, software, and office fumtture. Once the sale-and-leaseback is finalized, the lessee will receive 100% reimbursement of the acquisition cost of the equipment included in the lease. When this occurs, ownership of the equipment is transferred to the lessor and lease payments begin.

WHAT IS NEEDED TO FINALIZE A SALE-AND-LEASEBACK?

The financial disclosure requirements for a sale-and-leaseback are generally the same as a traditional lease transaction. The lessor wil require three years of annual financial statements, interim financial statements, and bank reference information. The lessor will also require copies of the vendor invoices for the equipment and cleared check copies as proof of payment.

WHY COMPANIES USE SALE-AND-LEASEBACKS FOR SOFTWARE & FURNITURE

Under Statutory Accounting Pmciples, software and furniture (including fixtures and leasehold improvements) are non-admitted assets. Therefore, when insurance companies pay cash for these projects, every dollar spent is a direct hit to their surplus. If surplus preservation is a priority, consummating a sale-and-leaseback transaction will replenish an organizatinon's surplus account and spread the cost of the software or furniture acquisition over the tenn of a lease (i.e., 3-5 years).

ABOUT FIRST AMERICAN EQUIPMENT FINANCE

First American Equipment Finance is an experienced lessor specializing in the healthcare, insurance, education, and legal industries. First American provides simple, innovative financing solutions for complex projects. First American specializes in combining products and services from multiple vendors and service providers into a single equipment lease. First American has a long-standing reputation for professionalism and exceptional service among sophisticated borrowers throughout the U.S.

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