Owning a car comes with challenges. You need to service and fuel it regularly. Some people are reluctant to purchase their first car since they perceive it as a liability. Others are burdened by owning cars that are not generating any income. If you are one of them, this article is for you. We will discuss sale-leasebacks with great emphasis on automobile retail. Both car sellers and buyers can benefit immensely by entering into a sale-leaseback arrangement.
How Sale-Leasebacks Occur
A sale-leaseback is a contractual agreement in which the owner sells their property but retains the right to continue using it. In this process, the ownership of the asset is transferred to the new buyer. A cash transaction is also involved where the original buyer receives the cash but continues to use the asset. After the sale-leaseback transactions are completed, the buyer becomes the lessor, while the seller becomes a lessee.
Who Can Enter Into a Sale-Leaseback Agreement?
Individuals and companies can sell their assets to raise funds and lease them back. Car buyers who have no immediate plans to use them can lease them back to the sellers. So long as you agree to the terms and honor your contractual obligations, anyone can get into the sale-leaseback contracts. Notably, you do not need to go through an agent or a middleman.
In automobile retail, a company can get into a sale-leaseback contract for various reasons. First, they can sell their automobiles to increase their cash flow. Also, the funds raised in this contractual agreement can offset debts and steer other development. Sale-leasebacks can also help a company transfer the automobiles’ risk to the buyer but continue using the vehicles.
Car owners can acquire funding for a new project while continuing to use the same car. Entering into a sale-leaseback agreement will enable you to sell your car but get the first priority as its lessee. This is a great strategy to cut the costs associated with car ownership, including price depreciation.
Benefits of Sale-Leasebacks for a Common Car Buyer
Both the seller and the buyer in a sale-leaseback agreement benefit from the transaction. The seller benefits in the following ways:
- First, they can free up the balance-sheet capital. The funds gained from the sale-leaseback transaction can then be invested to expand the business. The cash flow increase can also pay off a previous debt and improve the individual’s or company’s financial situation.
- Additionally, entering into a lease agreement for a long period helps to lock the expenses. The lease payments can be deducted from the monthly income and treated as business expenses for a company. If you agree to pay for the leased car every month, you can plan to offset the payment together with your other monthly expenses, including food and rent.
- The owner of an automobile can cash in on the increased value of a vehicle without losing access and use of the car. Also, you can decide to enter into this agreement to avoid more price depreciation as you continue to use the vehicle.
The buyer who later becomes the lessor enjoys the following benefits after getting into a sale-leaseback agreement:
- The lessor enjoys ownership rights while benefiting from the cash flow generated from a long-term lease agreement. This can be a good business venture for people who want to purchase cars for business purposes. You don’t have to worry about finding someone to rent your vehicle. Instead, the seller will lease back the same car and pay the agreed amount as the lease terms.
- The lessor can benefit from the immediate cash flow generated from the long-term lease agreement. This money can be invested in alternative businesses or used to improve the lessor’s standard of living. Sale-leasebacks eliminate the worry of having your car sit idly in your parking lot. Entrepreneurs will perceive this agreement as a good business opportunity for the lessor.
- In addition, sale-leasebacks can help the buyer avoid default risks. They do this by directly investigating the lessee’s credit. You can make an informed decision by checking the lessee’s income and credit rating before entering into this agreement.
- Also, the lessor will have an easier time terminating the sale-leaseback agreement in case of a default. Under a bank financing arrangement, the buyer/lessor must undergo a lengthy process before terminating the agreement.
- Further, the lessor enjoys residual value benefits. The residual value of a car refers to its price after the lease agreement ends or when it is terminated. The buyer owns the vehicle wholly, and they will want the value of the fixed asset after the lease agreement is finalized. Hence, the buyer/lessor can generate income through leasing and eventually make more money by selling the vehicle to another party at the end of the lease period.
Disadvantages of Sale-Leasebacks
There are various sale-leaseback cons that a regular car buyer should know about. The future depreciation of the asset only affects the lessor. This ultimately reduces the residual value of the vehicle. As a lessor, you bear all the risks of car ownership, including theft and accidents. The car model may be outdated, which would negatively affect the price.
Also, the new car buyer should know that the lease payments are tax-deductible. Thus, the buyer must remit taxes from the lessee’s payments. If you default on the tax obligations, you will be liable for penalties. The failure to pay taxes results in a penalty charged monthly at 0.5% of your unpaid tax.
Why You Should Consider Sale-Leasebacks
As a new car buyer, sale-leasebacks can be highly beneficial. You will own a car and lease it back without incurring middlemen’s cost. Nobody will coerce you to enter into the agreement if you are not comfortable. You will be at your discretion to do due diligence, including checking the seller/lessee’s income history.
Mostly, the leaseback value is higher than the depreciation rate of the car. Thus, the buyer will be making a profit in a sale-leaseback agreement.
The buyer/lessor should consider sale-leasebacks as an opportunity to reap the immediate investment benefits. Part of the cash used to buy the vehicle will be returned through the leaseback payments. This could be a better choice for someone who wants to retain some money for other purposes even after purchasing the vehicle.
Similarly, car sale-leasebacks can be helpful for buyer/lessor who intends to avoid the burden of debt financing. Some financiers have predatory terms that are disadvantageous to the car buyer.
In conclusion, sale-leaseback agreements are vital business options in the car retail business. The agreement adds value for both the seller/lessee and the buyer/lessor. As a seller, the agreement allows you to continue using the vehicle. For corporate branded vehicles, sale-leasebacks ensure the corporate entity can continue using the same branded vehicle even without ownership. Similarly, the buyer-lessors benefit as they remain the rightful owners even after leasing the car to the seller.
