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iStock_000001095558SmallBetter interest rates with operational leasing


The CFO of the Danish consultancy firm Bedriften A/S, knew that the company did not have the best interest rate on their main financing, a bank loan of DKK 200 million. The bank attached conditions to the equity ratio and it turned out that Bedriften A/S lacked DKK 50 million in equity to meet the Bank's requirements.

The difference in the interest rate is one percentage point and it burdened the accounts with DKK 2 million every year.

With the company's annual profits, it will take several years before there is sufficient equity. Additional borrowing to expand or improve efficiency is not possible.

Therefore, the management were considering reducing the balance through the sale-leaseback of assets. By using operational leasing the assets were removed from the balance sheet and the equity released. If a worth of more than DKK 50 million could be moved onto operational leasing, the company achieves significant interest rate savings on the main financing.

The positive effect of operational leasing

Therefore, the company looks through its assets in search of suitable objects that can be converted
to operational leasing.

The company finds production equipment, office equipment, IT, telephony and communications equipment valued at a total of DKK 75 million, which can be converted to operational leasing through a sale-leaseback transaction.

The company converted DKK 70 million to operational leasing. By paying by lease instead of instalments and interest on these items, the company achieved important positive effects:
 

  • Increased liquidity
  • Better economic key performance indicators due to a leaner balance sheet.
  • A lower interest rate on the main financing.
  • The ability to have further borrowing without affecting interest rates.