Hond Financial

Posts Tagged ‘asset resale’

For some businesses experiencing difficulty, they find themselves with all their capital tied up in large and costly assets. Whilst their competitors may be envious of their asset ownership, since they themselves are required to pay to use the asset in question, these struggling businesses are usually unable to continue trading without a large influx of funding.

When this position is reached, it may be found that to liquidate assets is unacceptable considering a poor secondary market, and also the fact that the practical utility of the assets remain high. In this situation, the resale price of the asset fails to reflect its true value, and so cash from other sources are sought after.

In these circumstances, the asset can clearly be seen to be well integrated into the business and therefore is suited to the running of the company.

Further, the business needs to prioritize the use of the asset over its ownership, and seek to make good use of the equity it holds in these assets. In this sense, for a lender to accept and place an asset as collateral for an injection of funds in the form of a loan, they would be required to structure any finance agreement around an assets profitability; it would simply not make good business sense to lend funds to an ailing business that is unable to be fully secured. It is crucial to ensure that there is sufficient cover in place in order to protect both the company and its employees; many companies are becoming increasingly aware of the benefits of business life insurance for shareholders, key people or employees.

In order to avoid these issues, cooperative providers of facilities to sell and lease back purchase the asset at a reasonable market value, therefore providing the business with the urgently required funds. The structure of the transaction will take into consideration the depreciation of the specific asset, however it will provide the sought after conditional security of funds required by the lender.

From that point a lease is executed where the business leases the asset back on terms congruent with its cash flow projections.

This arrangement can be seen to benefit both the lender and the borrower as both business needs are met: the borrower is able to continue using familiar and trusted assets in production whilst the lender obtains a profitable financial transaction that is secured in order to meet their own policies.

For the once-faltering business, they have a new lease of life, and the ability to ply their trade.

The accountants will simply view their balance sheet as depicting a transfer of assets from a fixed asset account to cash in the bank account. Being on the same side of the balance sheet, if the assets have been correctly depreciated, the transaction ought to leave the balance sheet unaffected. As a lease is now in place, the financial obligations running with such an agreement remain outside the balance sheet, but for the lease repayments being recorded as expenses or costs of sale. For any further information on life insurance or alternative methods of protecting your business, please click here.