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Leaseback refers to an agreement where a firm sells an asset and also takes agreement to Lease the asset back from the buyer. A leaseback is also known as a sale-leaseback and the details of the agreement are made during the sale of the respective asset.
The agreement would include the payment for lease and the duration included. In this arrangement, the seller becomes the lessee and the buyer becomes the lessor. A firm could undertake such an arrangement to be able to raise Capital. This way, it gets both the cash and the asset that is needed for the smooth functioning of the business.
The benefits of leaseback to the seller and the buyer are mentioned below:
One of the most common users of this arrangement are big builders or firms with big fixed assets like Land, property or large equipment/ Leaseback is also common in the transportation industries and aerospace sectors.
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Leaseback is used by firms when they have to utilise the cash they invested in an asset for other purposes for business operations. Sale-leasebacks are attractive as an alternative method of raising capital. When a firm is in a need to raise cash, instead of taking a loan it can use a leaseback.
This is because a loan is recorded as debt on the balance sheet. However, a leaseback can improve the firm’s health on a balance sheet. The liability on the balance sheet will reduce and current assets will increase.
Note that a sale-leaseback is not debt or equity financing. It is a hybrid or combination of both. With this arrangement, the firm will not increase its debt but gain access to capital through an asset sale.