Sale and lease back: How does it work?

Running a business takes vision—and sometimes, a little extra cash flow. A sale and lease back solution is a smart financing strategy for companies who want to get more out of assets they already own, such as machinery, IT equipment, or production tools. With sale and lease back, you can sell assets purchased within the past many years to free up capital right away, then lease them back to continue using them as before. 

Here’s how a sale and lease back agreement can benefit your business and what the process entails

How it works

Sale and lease back is a pretty straightforward process. Let’s say you have a high-value piece of equipment, like a production machine, office furniture, or POS solutions, and you want to turn it into capital without losing its use. By selling the equipment, you receive immediate cash while using it under a lease agreement. Like any other lease, you’ll make monthly payments and keep your operations running smoothly.

Imagine a production company owns a forklift worth DKK 1 million. The company plans to expand its operations and take on new projects, requiring additional equipment and new employees. However, they don’t have the cash to finance this expansion immediately, so they need to consider their options. They could either tap into their bank's credit facilities, delay the expansion for months or even years until they save up, or explore another solution.

After opting for a sale and leaseback solution to fund the expansion, the company sold its forklift for DKK 1 million and received DKK 1 million in cash. Despite the sale, the forklift remains a crucial part of their daily operations. By leasing it back and paying a fixed monthly payment, the company can continue using the equipment without disruption. This strategy allows the company to grow and secure new projects without sacrificing operational efficiency.

The benefits of sale and lease back

1. Free up liquidity

With options like sale and lease back, you can convert owned assets into cash while still using the equipment, optimising your company’s capital structure.

2. Improved Cash Flow

Sale and lease back can give your business an immediate cash flow boost, perfect for meeting short-term financial needs, reducing debt, or investing in new opportunities without needing a loan.

3. Make the most of your capital

Rather than letting valuable equipment tie up your capital, a sale and lease back agreement allows you to reinvest those funds into what truly drives your business. By freeing up your capital, you can stay focused on your goals and maintain momentum.

4. Potential tax deductions

Leasing payments are often considered operating expenses, meaning they’re tax-deductible in many cases. This allows you to manage essential equipment with possible tax benefits to improve your bottom line.

5. Flexible lease options

Leasing terms can be adapted to meet your company’s needs, from choosing the duration to finding a payment structure that works with your cash flow. It’s all about making sale and lease back work for you.

What to consider before signing a sale and lease back agreement

While sale and lease back can be a great option, there are a few things to keep in mind. The biggest one? You won’t own the equipment anymore, so when the leasing period ends you will have to return the equipment to the leasing company. However, if you wish to acquire the leased equipment, you will often have the option to request a purchase offer.

Furthermore, the total cost may be higher than owning it outright due to ongoing lease payments, so weighing the long-term benefits is essential. The leasing period will depend on the equipment’s age and condition, and the purchase price for the sale and lease back will be based on the original acquisition cost minus any depreciation.

A smart way to boost your business flexibility

Today’s business landscape demands adaptability. A sale and lease back solution can be vital for companies that want to optimise their finances and free up capital for growth without overcomplicating things. At kompasbank, we offer sale and lease back solutions* tailored to Danish SMEs, giving you the flexibility to grow and the capital to make it happen.

Although leasing may be more expensive over the entire period, you might generate much more revenue by using the funds to buy additional goods to sell at a higher profit, hire a salesperson, optimise your webshop, invest in marketing, etc. In other words, what might initially seem slightly more costly than owning could actually lead to a significant increase in earnings and revenue.

If you think sale and lease back could be a fit for your business, book a meeting here and find out how kompasbank can help you and your company.

Read more about leasing in our mini-guide.

*Commercial leasing at kompasbank is offered in collaboration with grenke Denmark.