The basic mechanism
You sell an asset you own, typically a property or a piece of plant, to a funder and simultaneously lease it back under an agreement that lets you continue using it. Cash arrives at completion and a rental or lease payment obligation begins.
The structure suits businesses that hold significant capital in assets they use but do not need to own. Ownership of a freehold warehouse, for example, is rarely a strategic advantage in itself, whereas the capital tied up in it can be.
Where it works well
It works where the asset has a clear resale market, where the business intends to occupy or use it for a long period, and where the released capital earns more than the lease costs. Funding an acquisition or a production expansion from a leaseback of an existing facility is a common and sound use.
For equipment, it is often the fastest way to raise cash against machinery already paid for, particularly when a bank will not extend further on cash flow grounds.
Where it goes wrong
The failure case is using a leaseback to plug an operating deficit. Cash arrives once, the lease obligation remains for years, and the underlying loss continues. That is a worse position than before, with less flexibility left.
The other risk is lease terms. Long leases with upward only reviews, onerous repair obligations or narrow break rights can outlast the strategy that justified the transaction. Negotiate the lease with the same care as the price.
Pricing and accounting
Price is driven by asset value, lease length and covenant strength. A strong occupier on a long lease attracts a keener yield, which means a higher sale price. Equipment leasebacks are priced against resale value and are usually shorter.
Under current lease accounting most leases sit on the balance sheet as a right of use asset and a corresponding liability, so the transaction does not remove the obligation from view. Check the effect on any existing covenant before proceeding.
Frequently asked questions
Will a leaseback breach my existing covenants?
It can, particularly disposal and leverage covenants, so consent should be sought before terms are agreed.
Can I buy the asset back later?
Sometimes, through an option, though options reduce the price a funder will pay because they cap the funder's upside.
Is this cheaper than a mortgage?
Not always. A leaseback releases more capital than a mortgage usually will, but the annual cost is often higher. Compare both before deciding.
Last reviewed: 2026-09-06