A contract that needs funding
Work is in hand, the margin is known, and the constraint is the working capital to deliver it. The arrangement is being tested against a number the business can actually name.
Guide
Selling an asset you keep using.
A sale and leaseback converts an owned asset into cash without the asset leaving the yard. It is a genuine tool with a real cost, and the cost is easy to lose sight of because the cash arrives first.
MS
Matt Stiles Editor
Published 8 September 2026 Last reviewed 8 September 2026 Read time 11 min
The short version
Five lines before the detail.
- The asset is sold and leased back on the same day. Operations do not change. The machine stays where it is and the crew that used it yesterday uses it today.
- Cash arrives against value already earned. This is not new borrowing against a new purchase. It is releasing capital sunk into something the business already paid for.
- The total cost is higher than a secured loan against the same asset. A leaseback prices a purchase and a lease rather than a loan, and the arrangement reflects that.
- It suits a specific problem. A solvent business with capital locked in plant and a use for that capital that earns more than the lease costs.
- Indicative only. Every figure here is illustrative. Actual terms come from the financier after assessment and valuation.
The mechanism
Two transactions, executed as one.
The financier buys the asset at an agreed value and immediately leases it back to the business under a finance lease or an operating lease. Two contracts, one settlement, and from the yard’s point of view nothing happens at all. The machine that was owned this morning is leased this afternoon and the work carries on uninterrupted.
What changes is the balance sheet and the bank account. An asset carried at book value has become cash, and a business with no finance obligation over that machine now has a lease running for the agreed term. The security position changes as well, with the financier holding the asset outright rather than holding an interest in it.
The agreed value is where a good deal of the negotiation sits. A financier is buying a used asset it may one day have to sell, so the valuation reflects a wholesale disposal view rather than what the business believes the machine is worth to it. Expecting replacement value and receiving trade value is one of the more common disappointments in this arrangement.
Step one
Sale to the financier
Step two
Lease back to the business
Elapsed time
Same settlement
Operational change
None
The honest framing
Why the cash feels free and is not.
The psychology of a leaseback is unlike other borrowing. No purchase is being made, no new asset arrives, and the money lands in the account without an invoice attached to it. It reads as unlocking something rather than as taking something on, which is exactly why the discipline that would apply to a loan application sometimes does not apply here.
It is borrowing. The business has an obligation it did not have last week, running for a fixed term, secured by an asset it no longer owns. Where the facility cannot be serviced, the machine is the financier’s and the recovery process is straightforward for them in a way that recovering an unsecured debt is not.
That is not an argument against the structure. It is an argument for putting it through the same test as any other facility, which is whether the capital released earns more than the arrangement costs, and whether the payments are serviceable from the business as it actually trades rather than as it is forecast to.
Worked example
A $120,000 machine, released and leased back.
A manufacturer owns a machine bought four years ago for $190,000, now carried in the books well below that and valued by the financier at $120,000 on a wholesale basis. The business has a contract in hand that needs $110,000 of working capital to fulfil and no appetite to extend its overdraft.
The leaseback releases $120,000. A four-year lease at an indicative 12% produces payments in the order of $780 a week, or roughly $162,000 across the term before any residual is considered. The contract, on the business’s own numbers, contributes materially more than that over the same period.
On those assumptions the arrangement works. It is worth noticing what makes it work, which is a specific, quantified use for the capital. The same transaction executed to cover a general cash shortfall releases the same $120,000, costs the same $162,000, and leaves the business paying for four years against a benefit nobody sized.
Illustrative figures
- Financier valuation
- $120,000
- Term
- 48 months
- Indicative rate
- 12%
- Indicative weekly payment
- ~$780
- Total of payments
- ~$162,000
- Cost of the capital released
- ~$42,000
Illustrative on stated assumptions and rounded. Not a quote or offer of credit.
The trade
What the arrangement gives and what it takes.
What it gives
- Capital released without disposing of the asset or interrupting production
- Access to funding for a business that is asset-rich and cash-constrained
- A fixed payment schedule that is easier to plan against than a revolving facility
- A route to funding where an unsecured application would be assessed on figures that do not reflect the asset base
- No operational disruption at all, since the machine never moves
What it takes
- Ownership of the asset, which passes to the financier
- A higher total cost than a secured loan against the same asset would ordinarily carry
- A valuation set on a wholesale basis, commonly well below what the business considers the machine worth
- An obligation running for the full term, against an asset the business no longer owns
- The end-of-term position, where continuing to use the machine may require settling a residual
Against the alternatives
Three ways to turn an owned machine into cash.
All three release capital. They differ on cost, on what happens to ownership, and on how quickly they can be arranged.
| Feature | Sale and leaseback | Secured asset loan | Outright sale |
|---|---|---|---|
| Business keeps using the asset | Yes | Yes | No |
| Ownership retained | No | Yes | No |
| Relative total cost | Higher | Lower | None, but the asset is gone |
| Capital released | Wholesale valuation | A proportion of value | Whatever the market pays |
| Obligation created | Lease for the term | Loan for the term | None |
| Suits a business that will replace the asset anyway | Reasonably | Less so | Directly |
Where the business will keep the asset and its register position is clear, a secured asset loan ordinarily costs less. A leaseback earns its premium where that route is unavailable or where the end-of-term flexibility is genuinely wanted.
Where it fits
Four situations where it is the right answer.
The common thread is a solvent business with a specific, quantified use for capital that is currently sitting inside a machine.
A gap between capital and cash
A business several years into ownership of substantial plant, with the balance sheet to show for it and a bank facility that has not kept pace. The value exists and is simply not liquid.
Restructuring an existing facility
Where a leaseback replaces a more expensive short-term facility, the comparison is between two costs rather than between a cost and nothing, and it can come out well.
An asset heading for replacement
Where the machine will be replaced at the end of the term anyway, the loss of ownership costs the business less than it appears to, and the lease term can be matched to the replacement cycle.
The case to be careful about
A leaseback used to cover a shortfall solves this month and adds four years of payments.
Where the capital released is going into general cash rather than into something that earns, the arrangement converts an owned asset into an obligation without a return attached to it. That is the pattern worth pausing on, and it is the one a leaseback is easiest to reach for, because the cash arrives without the scrutiny a new borrowing application would attract. An accountant looking at the whole position is better placed to judge it than a comparison of the payment against the amount released.
The accounts
Tax and accounting, which are separate questions.
Tax
The sale is a disposal.
Selling the asset to the financier is a disposal, and where the asset has been depreciated, disposing of it above or below its adjusted tax value ordinarily produces an adjustment in that year, subject to the accountant’s confirmation.
That adjustment can be material and it arrives in the same year as the cash, which is a combination worth knowing about before the transaction is signed rather than at the point the return is prepared.
The treatment of the lease payments that follow depends on the form of the arrangement and is a matter for the accountant. New Zealand tax rules can treat some leases differently from how the contract describes them.
Accounting
Presentation depends on the framework.
For entities reporting under NZ IFRS 16, a leaseback is recognised in a specific way and the asset does not simply disappear from the balance sheet in the manner an older intuition might expect.
For the many New Zealand businesses reporting under a different tier of the framework, the presentation question may not arise in the same form at all.
Which applies is a single question for the accountant, and it is worth asking before the arrangement is structured rather than after, because the answer occasionally changes what the business wants to do.
The process
How an arrangement is put together.
01
Valuation
The financier establishes what it is prepared to pay, ordinarily on a wholesale disposal basis and often supported by an independent valuation for larger assets. This figure sets the ceiling on everything that follows, and it is commonly lower than the business expects.
02
Register and title
The financier confirms the business owns the asset outright and that no existing security interest is registered against it. Where an earlier facility is still showing on the register, that has to be resolved before the sale can proceed, which is why a search early in the process saves time later.
03
Documents and settlement
The sale agreement and the lease are executed together, funds are advanced, and the lease term begins. The asset does not move. Where the lease carries a residual, the amount and the end-of-term options are settled at this point rather than negotiated later.
The test
The question is not whether the business can release the capital. It nearly always can. The question is what the capital will do, and whether what it does is worth more than four years of payments against a machine the business used to own.
The valuation
Why the number is lower than the business expects.
The gap between what a business believes its machine is worth and what a financier will pay for it is the most reliable friction in this arrangement. Both figures are defensible and they are measuring different things. The business is valuing an asset in productive use inside an operation that needs it. The financier is valuing the same asset as something it may one day have to sell quickly to a buyer it has not met.
Three factors widen the gap. A thin resale market widens it most, because the financier’s exit is slow and uncertain. Age widens it, because value has to remain across the whole term rather than only at the start. Specialisation widens it, since a machine configured for one operation is worth less to the next buyer than a standard one.
A business can narrow it only partly, and the levers that exist are worth knowing. Documented service history supports value. A machine presented properly, with its records and its attachments accounted for, values better than the same machine presented casually. An independent valuation obtained in advance gives the business a reference point rather than leaving the financier’s figure as the only number in the room.
When it goes wrong
Two situations worth seeing in advance.
Both are avoidable and both are common enough to be worth naming before an arrangement is signed.
The valuation comes in well under the plan
The business has committed to something on the assumption of releasing a particular amount, and the financier values the asset materially lower. The plan is now partly funded and the arrangement is signed anyway because the alternative looks worse.
What happens:A facility running for years against capital that was never enough to do the job it was raised for.
The payments outlast the benefit
The capital was released for a contract, a project or a push that has since finished. The lease has three years left and the thing it funded stopped contributing eighteen months ago.
What happens:A fixed obligation against an asset the business no longer owns, with no offsetting income attached to it.
Both are answered by the same discipline applied before signing, which is sizing the benefit in numbers and matching the term to how long that benefit actually lasts rather than to the longest term available.
The cost
What the lease behind the cash costs each week.
The amount released sits on one side and this sits on the other. Comparing them properly is the whole of the decision. Indicative only, and not a quote or offer of credit.
Indicative repayment
Weekly
$729/week
$3,160 /month $31,683 total interest
$120,000
$5,000 $500,000
4 years
6 months 5 years
12.00% p.a.
8% (secured) 30% (unsecured)
Indicative only. Not a quote or offer of credit. Actual rates, fees, and repayments depend on the business profile and the lender's decision.
Sending to Prospa
Your $120,000 scenario
4 years at 12.00% . Prospa will ask a few quick questions, then provide a firm quote and funding if eligible.
Redirecting…
Method
How this guide was written, and its limits.
The figures throughout are illustrative and calculated on stated assumptions rather than drawn from any particular financier’s pricing. Valuations, rates, fees and residuals vary by asset, by age, by industry and by applicant, and the only figures that matter to a business are the ones a financier puts in writing after assessment.
Nothing here is tax, accounting or financial advice. This site is not a chartered accountant or a registered financial adviser. The disposal adjustment, the lease treatment and the presentation question all turn on facts specific to the business, and an accountant is the right person to settle them.
References
Sources
- Inland Revenue, depreciation
The published source for the disposal adjustment described in the tax section.
- Inland Revenue, business income tax
Context for how a disposal in a given year interacts with a business’s wider position.
- External Reporting Board, NZ IFRS 16 Leases
The accounting standard relevant to how a leaseback is presented for entities within its scope.
- Personal Property Securities Register
Backs the point that an existing registered interest has to be resolved before a sale can proceed.
- Chartered Accountants Australia and New Zealand
Referenced for the point that the tax and accounting questions belong with a chartered accountant.
FAQ
Questions, answered
What is a sale and leaseback?
An arrangement where a business sells an asset it owns to a financier and leases it back immediately, so the capital tied up in the asset becomes cash while the asset continues to be used. Two contracts, one settlement, and no operational change.
Does the machine leave the premises?
No. Nothing moves and nothing about the day-to-day use changes. What changes is ownership, the balance sheet and the presence of a lease obligation that was not there before.
How much capital does it release?
Whatever the financier values the asset at, which is ordinarily a wholesale disposal figure rather than a replacement or insurance value. That gap is the most common source of disappointment, and it exists because the financier is buying something it may one day have to sell.
Is it more expensive than a loan?
Ordinarily yes, when compared with a secured loan against the same asset, because the arrangement prices a purchase and a lease rather than a loan. Where a secured loan is available and the business intends to keep the asset, it is generally the cheaper route.
Who owns the asset afterwards?
The financier. The business has the use of it under the lease and, depending on the structure, may have a route back to ownership at the end through a residual. That route is worth settling at the outset rather than assuming.
What happens at the end of the term?
It depends on the lease. A finance lease with a residual ordinarily offers settlement, refinancing or return. An operating lease ordinarily ends with the asset going back. Where continuing to use the machine matters, the end-of-term options belong in the negotiation at the start.
Does the sale create a tax event?
The sale is a disposal, and disposing of a depreciated asset above or below its adjusted tax value ordinarily produces an adjustment in that year, subject to the accountant’s confirmation. It arrives in the same year as the cash, which is worth knowing in advance.
Can it be done on an asset that is already financed?
Not straightforwardly, because the financier is buying the asset and needs clear title. An existing registered security interest has to be resolved first, which sometimes means the arrangement releases considerably less than expected once the earlier facility is settled.
What kinds of asset suit it?
Assets with an established resale market and a serial number, held outright, in sound condition and with useful life remaining. Specialised plant with a thin market attracts a more conservative valuation, because the financier’s exit is harder.
Is it a sign of distress?
Not in itself. It is a normal capital management tool for asset-heavy businesses and it is used routinely by solvent ones. It becomes a warning sign when it is used to cover a shortfall rather than to fund something identified, which is a distinction about purpose rather than about the structure.
How long does it take to arrange?
Longer than a straightforward equipment facility, because a valuation and a title check sit in the middle of it. A business planning around the cash arriving on a particular date is better served by starting earlier than it thinks it needs to.
Is this guide financial advice?
No. It describes how the arrangement works in general terms. This site is not a registered financial adviser or a chartered accountant, and whether a leaseback suits a particular business depends on facts a website cannot see.
Related
Keep reading
Sale and leaseback
The structure page, with the terms and the fit set out.
Read onReleasing equity from owned assets
The use case this guide sits underneath.
Read onSecured asset loan
The alternative that ordinarily costs less where ownership is being kept.
Read onThe PPSR and security interests
Why clear title is a precondition for the sale leg.
Read onGST and depreciation
The disposal adjustment the sale leg can produce.
Read on