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Unlock This CourseWhen businesses need money quickly, they don't always have to look outside for help. One way they can raise cash internally is by selling things they own - these are called assets. Think of it like selling your old gaming console to buy a new one, but for businesses!
Selling assets is a popular method of internal financing because it's quick, doesn't create debt and uses resources the business already has. However, it's not always the best choice and businesses need to think carefully about what they're giving up.
Key Definitions:
Business assets are like a person's belongings, but for companies. They include everything from the building where they work to the computers they use. Some assets are essential for daily operations, whilst others might be extras that can be sold without affecting the business too much.
Not all assets are the same when it comes to selling them for finance. Some are easier to sell than others and some are more important to keep for the business to function properly.
Offices, warehouses, shops and land. These are usually worth a lot of money but take time to sell. Many businesses sell property and then rent it back (called sale and leaseback).
Company cars, delivery vans, machinery and tools. These can be sold relatively quickly but the business might need to replace them or find alternatives.
Shares in other companies, spare inventory, or unused materials. These are often the easiest to sell without affecting daily operations.
Accountants split assets into two main groups. Current assets are things that can be turned into cash within a year, like stock or money owed by customers. Non-current assets are long-term items like buildings and machinery that the business plans to keep for more than a year.
When selling assets for finance, businesses usually prefer to sell non-current assets that aren't essential for daily operations, or current assets that they have too much of.
In 2019, supermarket giant Tesco sold several of its store properties for £200 million to raise cash for expansion and debt reduction. They continued operating the stores by renting them back from the new owners. This gave them immediate cash without losing their retail locations.
Selling assets can be a smart financial move for businesses, especially when they need money quickly or want to improve their financial position.
Unlike applying for loans or finding investors, selling assets can provide cash relatively quickly. There's no lengthy application process or need to convince outsiders to lend money. The business has full control over the decision.
When you sell an asset, you get cash without owing anyone money. This is different from loans where you have to pay back with interest.
The immediate cash injection can help solve short-term financial problems and improve the business's ability to pay bills and invest in growth.
Selling old equipment or property means no more repair bills, insurance costs, or depreciation expenses for those items.
However, selling assets isn't always the perfect solution. There are several drawbacks that businesses need to consider carefully before making this decision.
When you sell an asset, you give up any future value it might have provided. For example, if a business sells a building that later increases in value, they miss out on that profit. They also lose any income the asset was generating, such as rent from tenants.
Selling essential equipment or property might make it harder for the business to operate efficiently. They might need to rent or buy replacements at higher costs.
You can only sell what you own and once it's sold, that source of finance is gone. Unlike loans, you can't keep going back to the same well.
The amount you can get depends on market demand. In tough economic times, assets might sell for much less than expected.
A family restaurant chain needed £500,000 to expand to a new location. They owned three delivery vans worth £60,000 each and the freehold property of their original restaurant worth £400,000. They chose to sell the property and lease it back rather than sell the vans, as the vans were essential for their delivery service but they could operate just as well renting the building.
Timing is crucial when it comes to selling assets. Smart business owners know when it makes sense and when it might be better to look for other sources of finance.
Asset sales work best when the business has non-essential items to sell, when market conditions are favourable, or when the business needs to restructure and focus on core activities. It's also good for emergency situations where quick cash is needed.
Emergency cash needs, market values are high, business restructuring, too much unused inventory, or when the cost of keeping an asset exceeds its benefits.
Before selling any asset, businesses need to work out the true cost and benefit. This isn't just about the sale price - there are other factors to consider.
Businesses should consider the original cost of the asset, its current book value, the expected sale price, any costs of selling (like estate agent fees) and the ongoing costs they'll save or new costs they'll face after the sale.
For example, if a business sells a company car for £15,000, they save on insurance, maintenance and depreciation costs, but they might need to pay mileage allowances to employees who now use their own cars for business trips.
A business sells machinery for £50,000. They save £5,000 per year in maintenance but lose £8,000 per year in production efficiency by using older equipment. The net annual cost of selling is £3,000, so they need to ensure the £50,000 cash injection provides benefits worth more than £3,000 per year.
Before rushing to sell assets, businesses should consider whether other internal finance sources might be better, such as using retained profits, reducing stock levels, or improving debt collection to free up cash.
Asset sales are permanent decisions. Once sold, getting the asset back usually costs more than the original sale price. Businesses should exhaust other options first, especially for essential assets.