Sale and leaseback transactions not only help by freeing up cash, they also can help fleets with life cycle management of their assets, which is increasingly important based on current market conditions.

Originally appeared in Fleet Owner

COVID-19 has caused many executives to focus on ways to retain cash. In a recent blog post, I talked about the importance of evaluating everything in your organization to try to find hidden cash.

While there are a variety of ways to get cash back into the business, one that makes sense today is a sale and leaseback. This strategy is where the owner of the asset sells the asset and then leases it back from the buyer. The seller of the assets becomes the lessee and the buyer of the assets becomes the lessor. Under this arrangement the seller-lessee treats the income from the sale as normal revenue and the lessor may take depreciation.

Sale and leaseback allows the seller to retain use of the asset but also frees up cash.

Sale and leaseback transactions not only help by freeing up cash, they also can help fleets with life cycle management of their assets which takes on increased importance based on current market conditions. If a fleet has vehicles across a range of model years, a sale and leaseback can help optimize the fleet.

Here’s how it would work:

  • The oldest assets would be sold
  • The assets in the mid-range would be put on short-term leases
  • Newer assets would put on long-term leases

This results in a rationalization of the asset replacement cycle and offers the fleet immediate cash at a time when many companies are seeking cash infusions.

In addition to the access to cash, a sale and leaseback will transfer the residual risk to the lessor, and effectively refinance the assets at a lower rate.

Given the realities of today’s market, with its uncertainty and low used truck values, sale and leaseback may be a good option to not only bring in cash, but also to prepare fleets for the tough economic times ahead.