SALE and leaseback is a popular funding method used by companies in all types of business and most suitable for businesses that have more than 25 vehicles.
So how does sale and leaseback work?
A fleet management company buys a company’s existing fleet of cars and vans.
Then it leases them back to the company at a fixed monthly rental for an agreed period.
The most common funding method is contract hire.
What are the benefits of a sale and leaseback agreement?
- Company cash tied up in the fleet is released and can then be reinvested in the company’s core activities.
- The financial risks of running the fleet are now outsourced to the fleet management company.
- Fixed monthly payments mean better long-term financial planning and budgeting for the customer company.
- Many of the company’s admin burdens are removed – and they can benefit from the fleet management services and expertise provided.
There are some possible drawbacks.
Companies that own their vehicles have the flexibility to sell when they wish – possibly taking advantage of good selling conditions and making the most of the value.
With contract hire that ultimate control is lost. There are charges if a contract is terminated early. Or if agreed mileages are exceeded.
What sort of companies benefit from sale and leaseback?
Usually they are companies that have not considered the value of leasing before.
The decision often reflects a change in direction for the company concerned, which has tipped the balance against the benefits of outright purchase.
For example, the company may no longer be able to field the personnel and resources to administrate the fleet and control operating costs.
Alternatively, a change may have taken place in the company’s financial priorities. They might want to remove company vehicles from the balance sheet and benefit from improved credit lines.
Companies that choose sale and leaseback should expect financial, HR and operational support from the fleet management company – a substantial benefit amid changing legislation and compliance demands and the responsibilities for ensuring duty of care.
It is important not to look on sale and leaseback as simply a cash flow release mechanism but rather as part of a coherent fleet strategy for the company moving forward.