Sale and leaseback

Definition

Sale and leaseback is a transaction in which a business sells an asset (often property or plant) to a finance provider and immediately leases it back, releasing the capital tied up in it while retaining operational use.

In plain terms

It unlocks cash frozen in an asset you want to keep using — swapping ownership for a rental commitment and a lump sum today.

Why it matters for your company

It can fund growth or refinance expensive debt using value you already own, but you give up the asset and future appreciation. Weigh the released cash against the lease cost, and compare with a straightforward business loan.

In practice

Picture a manufacturing company that owns its freehold premises outright. The building sits on the balance sheet as a valuable but illiquid asset — useful as security, but not something that can be spent on new machinery or wages. A sale and leaseback converts that value into working capital: the company sells the freehold to a specialist landlord or finance provider and simultaneously signs a lease to keep operating from the same site, so day-to-day trading is undisturbed.

The practical shift is from owner-occupier to tenant. Maintenance and insurance obligations may move to the new landlord depending on the lease terms, but the company now carries a fixed rental commitment where it previously had none. Directors typically weigh this against alternatives such as a business loan secured differently, since a leaseback changes the company's asset base rather than simply adding debt on top of it.

How lenders and landlords read it

A sale and leaseback is assessed less like a loan application and more like a property transaction paired with a covenant strength check. The counterparty wants comfort that the lease payments are affordable from ongoing trading, and that the asset itself — its condition, location and marketability — supports the price being paid, since they are taking on ownership risk rather than just a security interest.

A common pitfall is treating the released cash as free money without pricing in the new lease obligation across its full term, which can leave a company more exposed to fixed costs than before, particularly if trading conditions later soften. Reviewing the lease term, renewal terms and any restrictions on how the premises can be used is normally worth doing alongside comparing the deal with straightforward business loans or refinancing routes.