Reusable packaging sales-leaseback programs offer the opportunity to free cash needed during COVID-19 recovery and beyond.
As businesses look to recover after the COVID-19 pandemic, many businesses will be experiencing cash flow issues. One opportunity to improve this situation is to look at the opportunity of sales-leaseback, typically referred to as leaseback. In a leaseback arrangement, a company may sell its assets and then lease those same assets back from the purchaser.
“A sale-leaseback enables a company to sell an asset to raise capital, then lets the company lease that asset back from the purchaser. In this way, a company can get both the cash and the asset it needs to operate its business,” explains Investopedia.
I first heard about leaseback programs for reusable packaging that involved the poultry industry back in the 1990s. AAM Capital has been providing such programs since the late 1980s. “We’ve been using sale and leasebacks since 1988,” Nick Clements of AAM told me recently.
Lease-buyback of reusable containers releases cash for food producer
“It used to be a pretty common method of financing business equipment, but a lot of leasing companies don’t seem to use it for equipment financing anymore,” he explained. “We still find it useful, so we continue to promote it. Sale and leasebacks are still used frequently in the U.S. for property, office, and land acquisitions, which is where most businesses will probably be familiar with it.”
The company has used sale and leaseback (“SLB”) for a whole range of equipment, ranging from computers to materials handling equipment, IBC’s, safes, and production machinery.
Clements describes an AAM transaction that involved a U.S. food producer. It acquired plastic containers over a period of many months, in dozens and dozens of deliveries, and paid the vendor 30 days after each consignment was delivered. “Once all of the containers were in-service across the U.S.,, the food producer entered into a sale and operating leaseback with us for a 7-year term,” Clements explained. “It was impractical to conduct an audit and inspect all of the containers, so we relied on a sample visit to a single plant, conducted when the SLB contracts were signed.”
Companies utilize the proceeds of sales-leaseback for marketing, staffing, new equipment acquisition and more
Customers tend to use the proceeds of SLB for different purposes, although all are linked to the operation of the business. “We know of examples where the cash we’ve paid to customers has been used for marketing campaigns, hiring people, dividend payments to owners and stockholders, moving office locations, paying for other business equipment and assets, paying down loans when bank facilities expire or reducing other borrowings where the rates are maybe less attractive than the lease costs, or the facilities less flexible,” Clements explained.
According to AAM, SLB transactions are typically in the hundreds of thousands or millions of dollars, however, the company does write smaller transactions for equipment that has been acquired recently. A recent example was a customer acquiring two smart safes for $20,000 but intending to acquire another 20, which it would also include in the SLB program.
The SLB application process
Generally, AAM offers sale and leaseback for familiar equipment so an initial audit is not always needed. “For an example,” Clements said, “if a food producer purchased 1000 IBC units in December 2019 and wanted to enter into an SLB for a 5-year term today, and it could provide the invoices and the manufacturer/vendor validated that the units had been supplied, we would be comfortable financing the IBCs because we understand their useful life is longer than the financing term of 5 years.”
The application process is the same as for a standard lease. The lessee fills out a straightforward application and supplies any accounting information needed, along with details of the original vendor and the equipment for the SLB.
“SLB is a great way of releasing the cash that is tied up in assets,” Clements summarized. “But to take it to the next level, a leasing facility for new equipment can ensure that cash isn’t tied up in equipment in the future, and remains free to use for other business activities as soon as opportunities such as hiring back people, acquiring stock, or marketing the business emerge.”