THE BANKS still seem unwilling to relinquish their cash – but one way to improve your liquidity is to consider a sale and leaseback of your company cars. Business Car Manager motor finance writer, Brian Rogerson, reports.THE PHRASE ‘cash is king’ has never been more applicable than today.

In an economic climate where credit is difficult to find, UK businesses are squeezing every possible pound from current operations – turning over stock, tightening up accounts receivable and floating accounts payable.

One tempting source of cash can be the company’s business cars. Depending on their numbers, company cars can represent large amounts of ready cash. With the economy still firmly in recession selling your business cars and leasing them back from a motor lessor is becoming more popular each week.

Turning cars into cash

According to the findings of a survey carried out by Lex Autolease by YouGov, as many as 25% of finance directors are contemplating offloading their company-owned vehicles in a bid to raise cash for their businesses in a sale and leaseback arrangement. The popularity of this form of funding, essentially a switch from ownership to contract hire, re-ignited during the latter part of 2008 and has continued to grow during the worst of the credit crisis.

Andrew Kirby, regional sales director at Lex Autolease, has calculated that UK firms have benefited from a cash injection of over L50m in the last 12 months as a result of purchasing large number of outright-purchased vehicles. “For many firms that are looking at ways to finance their business,” he said, “sale and leaseback is often an ideal solution. It provides immediate cash injection to service debts or to fund investment priorities. More companies can benefit from releasing the capital tied up in their vehicles and begin the process of using managed contract hire arrangements to drive down the costs of mobilising employees.”

What is a sale and leaseback?

The sale and leaseback concept is relatively straightforward. The company has an asset of some value, sells it, and then leases it back from the buyer. The buyer owns the asset (the cars) and the seller pays the buyer for its use.

How much cash can be generated? If we assume a firm has 25 business cars and business vans at various points in their respective service lives. Some will be new, some near replacement, and the remaining will be at various points in their lifecycles. If we also assume the average net value of each vehicle (using the unamortised capitalised cost) is L7,500, the sale would gross L187,500 in cash for the company. The leaseback, of course, will entail provisions for the cost of funds and some administrative fees, but the primary issue is looking at the generation of cash, not comparative cost.

Sale and leasebacks can be done with either a company-owned or (more unusually) a leased fleet, where the cars are purchased from one lessor by another. The transactions are sometimes used to quickly move company vehicles from one lessor to another – rather than through attrition. However, turning a company’s business cars from an asset into cash is the most common purpose of this exercise.

Roddy Graham, commercial director of Leasedrive Velo, stressed that a company car park can be the biggest hidden bank account a company has. “In a climate where corporate credit is hard to find and where existing credit agreements are slashed,” he said, “it is a good source of cash and an opportunity for companies to make money from an asset that is guaranteed to depreciate.”

He added: “It also provides predictable cash flows through a monthly rental fixed for the period of the lease and could also help with the firm’s company car administration.”

Strategic implications of a sale and leaseback

Owning and managing cars simply isn’t a core activity for the vast majority of businesses. So the issue of sale and leaseback should be seen as a strategic decision about whether to lease or own cars outright rather than as a purely finance-driven decision.

Nevertheless, if a company contract hires its company cars it also diversifies its sources of funding, attaches specific vehicle market knowledge to the acquisition, management and disposal of its vehicle assets – and insulates itself from residual value risks. Outright purchase, on the other hand, ties up capital in depreciating assets.

Fleet Alliance comment on sale and leaseback

Martin Brown, managing director of business car solutions provider, Fleet Alliance, comments:

“There is no doubt that the current economic climate provides an excellent back drop for business users to opt for sale and leaseback. The benefits are not solely a cash injection from the purchase of the asset. There are other important considerations.

“These must include all of the operational benefits of contract hire, such as service, maintenance and repair and fixed budget costing.

“Arguably the key benefit is removing the business from the murky world of vehicle disposal and the associated risk.

“One note of caution is that, whilst the current climate makes sale and leaseback a viable option for businesses, credit could pose problems. One of the key things an underwriter will look for is signs of ‘stress funding’ – for example cases where sale and leaseback cash keeps a weak business trading.

“All things considered I would expect to hear a lot more of this product in 2010.