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Improving Liquidity Through Equipment Sale-And-Leaseback

Improving Liquidity Through Equipment Sale-And-Leaseback

3/26/2016

As organizations approach their fiscal year-end, accounting and finance professionals begin to analyze their company’s year-end financial position. In a turbulent 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 month of a company’s fiscal year, executing a sale-and-leaseback transaction on 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 typically included in a sale-and-leaseback are computer equipment, telephone systems, networking infrastructure, printers, software, and office furniture.

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 will require three years of audited 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. Equipment inspections may also be required.

Ensuring Security Interest

The lessor will verify that the equipment is not encumbered by the lessee’s existing credit provider(s). If a lien has been filed on the equipment being transferred, a lien release may be needed. Most leasing companies will work with the lessee’s credit providers on obtaining the releases without any additional administrative burden on the lessee.

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First American Commercial Bancorp, Inc. is a wholly-owned subsidiary of City National Bank. Deposit products and services are offered by City National Bank Member FDIC. City National Bank is a subsidiary of Royal Bank of Canada. “First American Equipment Finance” is the trade name for certain equipment leasing and finance businesses of First American Commercial Bancorp, Inc. and its subsidiaries. Equipment financing transactions are provided in Canada by FA Equipment Finance, Inc. For California clients: Loans made or arranged pursuant to a California Finance Lenders Law license. All transactions are subject to credit approval. Some restrictions may apply. All trademarks are the property of their respective owners.

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