Using Equipment Leasing To Restructure Debt
“Equipment Leasing Can Be An Effective Way To Restructure Short Term Debt”
Equipment leasing through a sale and leaseback process can be a very efficient and effective way to restructure the short term debt on your balance sheet.
When we speak of the need for short term debt restructuring, this refers to situations where the business is behind on short term debt obligations such as trade credit, operating accounts, and government remittances.
If these accounts are not brought up to date, the business runs the risk of having credit reduced or eliminated and having collection action taken against it which can restrict the ability to operate or even stop business operations all together.
When there is considerable equity in equipment assets, the best solution for generating additional capital to pay up short term debt and then repay the refinanced amount over future years is through equipment leasing.
The equipment leasing process for debt refinancing, described as a sale and lease back transaction, has the lender or leasing company purchase the assets from the business in return for incremental capital and an equipment lease that allows the business to retain exclusive access to the equipment during the term of the lease.
At the end of the lease term, the equipment is typically bought back from the leasing company for some nominal amount that was determined at the outset of the financing.
The leverage that can be secured from this type of transaction will depend on a number of factors including the type and condition of the equipment and the financial profile of the business.
Basically, the more stable the business operation and the longer the remaining life of commodity type assets, the more leverage that can be secured.
Debt Restructuring Through Equipment Sale And Leaseback Can Be A Business Saver
In most cases, the cost of a sale and leaseback transaction for the purposes of debt restructuring is going to cost more than conventional financing for the purchase of a new or used piece of equipment.
But when you compare the incremental cost of financing to the business risk that is being reduced or eliminated with respect to trade credit and government remittances in particular, the additional cost can prove to be insignificant.
That being said, equipment refinancing costs can also get quite high if the business is considerable financial distress, so the cost of the debt restructuring action should always be weighed against the benefit being gained from doing so.
The primary goal here is to develop structured repayment of short term debt into an equipment leasing facility so that the short term debt that has built up can be paid back over a longer period of time without causing any further financial distress to the business.
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