AGREEMENT OF
CANCELLATION OF LEASE CONTRACT BEFORE FIXED TERM (PREMATURELY)
A leaseback is an arrangement where the seller of an asset leases
back the same asset from the purchaser. In a leaseback arrangement, the
specifics of the arrangement are made immediately after the sale of the
asset, with the amount of the payments and the time period specified.
Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement.
A leaseback, also referred to as a sale leaseback, is neither debt or
equity. In fact, a sale leaseback is more like a hybrid debt product.
The company does not increase its debt load but gains access to capital
through the sale of assets. This is much like the corporate version of a
pawn shop transaction. The company goes to the pawn shop and in
exchange for a valuable asset, receives a certain amount of cash. The
only difference is that there is no expectation for the company to buy
back the asset.For example, assume company A has a need for additional capital to pay employees and contractors but can't access the debt markets due to poor credit. The company sells equipment to an insurance company with the understanding that the equipment is to be immediately leased backed to the seller. As long as the amount charged for this service by the insurance company does not exceed the rate of interest on high interest loans, the sale leaseback is the better option.
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