Financing on the brink?

Another finding from the study: traditional bank financing will only play a subordinate role in the future. This is also the experience of many medium-sized producers. They are finding it increasingly difficult to obtain loans. Lenders are increasingly reluctant to lend, especially in special situations. This is largely due to stricter legal regulations: For example, credit institutions will have to provide more equity for their risk positions in future. In addition, a strict upper limit for the long-term debt ratio must be observed. As a rule, this means that banks require a good credit rating as the most important lending criterion. In addition, traditional lending institutions are often too slow due to their complex internal structure and the sometimes lengthy processes involved in special events: time is usually short here; solutions and decisions must be reached within a few weeks. For manufacturing companies, however, a number of financing alternatives have emerged in recent years that offer useful options, especially in special situations. These include the sale & lease back approach.

What is Sale & Lease Back?

The model is one of the asset-based types of financing. In the case of Sale & Lease Back (SLB), this means that instead of a company's credit rating, the focus is on its machinery, plant and vehicle fleet. If these assets are valuable, mobile and universally deployable - i.e. common types - they can be used to generate fresh liquidity via SLB. To do this, a manufacturing company sells its machines to an SLB provider and leases them back immediately afterwards. The purchase price is transferred to the company account

and is available without conditions. In this way, hidden reserves that would otherwise lie dormant unused in the company can be raised and used in the form of liquid funds for the development of the company. It usually only takes a few weeks from obtaining an initial offer to the final payment of the purchase amount. In addition to this speed advantage, the fact that this financing approach is independent of banks and credit ratings makes it ideal for special situations. What's more, during the entire process, no machine has to leave the hall and no vehicle has to leave its place of use - production can continue uninterrupted.

Advantages and requirements

Sale & Lease Back is usually suitable for manufacturing companies with a turnover of between 5 and 250 million euros. A desk valuation of the machinery and equipment is often sufficient for an initial assessment of the financing framework. However, the basis of the subsequent SLB contract is the assessment of the current value by an expert. Leasing within the framework of SLB is carried out as partial or full amortization. In the latter case, the company pays off the entire acquisition costs within the term of the contract and later has the option of buying the machines back from the financier or extending the leasing contract. In the case of partial amortization, the lessee can repurchase the assets at the end of the contract term at the contractually agreed residual value - the SLB provider has a so-called put option. Here too, the lessee has the option to extend the contract at the end of the term. If hidden reserves are released through sale & lease back, this also increases a company's equity ratio. This can have a positive effect on a company's credit rating and creditworthiness - which in turn can facilitate later negotiations with other financiers.

However, in order to be able to use the model effectively, certain requirements must be met: there must be a secondary market for the respective objects, i.e. they must not be custom-made, unique or prototypes. In addition, SLB does not work for individual machines - the model is always aimed at an entire fleet of machines, systems or vehicles.

Who benefits from Sale & Lease Back and in what situation

The SLB approach is suitable for a whole range of industries. It starts with machine, tool and plant construction and continues through construction and earthmoving to food processing, textile production, the printing industry, furniture construction and others. Particularly in special situations, Sale & Lease Back offers a fast and flexible financing solution when traditional loans do not work. These situations include restructurings, reorganizations and financial restarts after a crisis, as well as investments in new technologies or business areas, realignments of the business model, adjustments to internal processes or shareholder payouts.

Sale & Lease Back is a practical option for many occasions. It complements other alternative financing and existing connections to the house bank. The goal of manufacturing companies should be a strategic mix in view of the current economic development. To achieve this, decision-makers need to look at different models and make a precise selection: What does my company need in which situation? In this way, a tactically sensible, individual and crisis-proof financing structure can be established.

The author: Carl-Jan von der Goltz, Managing Partner of Maturus Finance GmbH