The advantages of sale and rent back (SARB)

November 6, 2015

Many organisations choose to purchase new equipment with an operating lease to spread payment of often expensive equipment over the life span of the assets. This strategy also allows these groups to upgrade the equipment as and when it’s necessary without straining the capex budget.

Take a piece of manufacturing machinery, for instance. It may become outdated before its expected lifecycle is complete, leaving the owner with a potentially substantial expense if they reinvest in the asset. When that machinery is leased, the lessor would instead replace or upgrade the equipment as per the agreed terms.

But what if the organisation has already invested recently in new equipment and purchased it outright? They may believe that the door is closed, forcing them to continue with less security over their equipment maintenance schedule.

Sale and rent back agreements have the potential to make a difference

A sale and rent back (SARB) agreement is the process of selling equipment or assets to a finance company and then leasing them back via repayments. It’s important to note that the finance provider retains ownership of the assets as part of a SARB agreement.

Through the agreement, a company receives a cash injection by selling their equipment, though still continues to use the equipment throughout its effective lifecycle. The financial boost can be used when times are tough, making repayments easier to manager, or it could provide the extra financial impetus for successful businesses to invest in growth.

For example, if a manufacturer wishes to increase its marketing efforts but finds itself restricted by a limited budget, it can sell a proportion of its assets to the financier. The money comes through at a written-down value, while production continues unhindered.

Our research shows that as of September 2015, 12.9 per cent of surveyed businesses intend to reduce their asset ownership. A SARB agreement allows them to do so sustainably, and can be used to spur growth, even when the owned asset base is contracting.

What are the benefits of SARB?

On top of the cash injection, a SARB strategy shares many of the same advantages as an operating lease. These include:

  • Reducing the amount of capital tied up in ageing assets
  • Improving cash flow through smaller, regular payments
  • Allowing the business to move its payments into the opex budget, opening the door to additional tax benefits.

An additional and important benefit of SARB is the transfer of ownership of the asset from the business to the lessor. This can result in an easier process for businesses as at the end of the equipment lease term, they have the option of confronting any effects of outdated equipment that may slow (or stop) productivity via an upgrade.

Keeping equipment in good shape

Our September 2015 Equipment Demand Index shows that 62.9 per cent of Australian businesses consider their productivity impacted by assets overdue for replacement. The idea of SARB is to create a way for organisations to pass on some of the burden of upgrading equipment to their lessor.

It’s therefore becoming increasingly likely that a SARB strategy could benefit various industries across Australia, should it suit their business strategies.

Loosening cash restraints

In addition, our latest research shows that 73 per cent of Australian microbusinesses and 58 per cent of small firms are not planning to change their capital expenditure budgets at all in FY16, while a further 11 per cent and 19 per cent respectively intend to reduce their capex spend. By selling their current assets and renting them back, such a strategy can still deliver growth, should that be the business’ intention.

It may not remove cash flow challenges altogether, but with the ability to find a quick and substantial financial boost through SARB, businesses can focus on conquering the economic seas, rather than merely staying afloat on them.

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