Working capital is an essential part of every business and indicates their financial health.
The amount of positive working capital a business needs to run smoothly will vary depending on a range of factors. These include business type, operating cycle as well as current and future growth goals. While large businesses can get away with a negative working capital ratio for a short-term (because of their ability to raise funds quickly), small to medium businesses need to actively maintain a healthy level of working capital.
Your business may need an injection of capital – but how do you go about raising it?
One way many businesses gain access to additional cash is through financing known as a sale and leaseback.
In a Sale and Leaseback financial arrangement, your business sells their equipment to a financier who then immediately leases this equipment back to your own business, generally over a 3 to 5 year term.
This arrangement makes financial and operating sense in situations where a business owns it’s business assets and needs a timely cash injection for working capital, and most importantly, still needs these assets to continue trading.
There are a number of potential benefits to sale and leasebacks, but the biggest is the instant cash infusion. It allows a company to redeploy capital that is invested in assets back into the core business. The agreement may also be structured to allow the seller to buy the asset back again at a future date.
Assets that can be used include business vehicles, commercial vehicles, commercial equipment, heavy machinery, farming machinery and more.
A business purchases a new business vehicle on a cash basis.
In six months’ time that business receives a large tax bill, however it has put all of its spare cash into a business vehicle purchase so has no available cash to meet these tax obligations.
By selling the vehicle to a financier and then leasing it back from them instantly injects working capital into the business, allowing them to meet their tax obligations.
If you’re looking to raise funds and have eligible business assets available, contact our team of business finance specialists today on (03) 5223 3453 to discuss your specific needs.
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