Leaseback Financing: Short Term Capital Without Debt
Businesses cannot prepare for all contingencies. Unexpected financial obligations arise for various reasons. Light sales periods can place a temporary, yet significant, strain on cash flow, which in turn impacts regular operations. For the longest time, businesses would turn to bank loans for short-term working capital to get past a rough patch. However, more entrepreneurs are using leaseback financing because it offers more benefits.
Short Term Capital, Long Term Debt
Taking out loans to overcome short term financial hurdles may not provide the best solution. Loans place debt on the balance sheets, which can compound financial problems after the money is used. If the capital provided by the loans can solve the problem, great. But the debt and impacted credit ratings still exist. Leaseback financing provides short term working capital without saddling businesses with unnecessary debt.
How Leaseback Financing Actually Works
Leaseback financing can be broken down into two key components. First, equipment is sold in exchange for short term capital. The amount of capital received through leaseback financing is based upon the value of the equipment used. The value is determined by how new the equipment is, the uniqueness of the equipment, and other factors. The second component to leaseback financing is, as the term states, “leasing.” Once the equipment is leveraged for working capital, the business then repays the amount borrowed by leasing the equipment back. This still gives businesses access to the equipment they need so they can perform regular operations or fill customer orders. From an operational stance, nothing changes.
Leaseback financing also comes with tax benefits for businesses. According to the IRS Tax Code, any payments made on leased equipment are tax deductible. This means that during the second phase of leaseback financing, any payments made to the lender can be deducted on the tax forms. In some cases, businesses even see money back from this arrangement. Keep in mind, however, that the IRS only allows lease-related deductions up to a limit of $500,000. Leaseback financing does not place debt on the balance sheets, and lowers the amount of taxes owed by a business, which are two big benefits that traditional loans cannot provide.
Get The Working Capital You Need Today
If your business needs fast working capital, but you would like to sidestep the debt and restrictions that come with traditional loans, talk to the experts at BG Capital Funding Group.