As is quite often the case in business, a company may be asked to provide proof of funds for a particular project or asset purchase. In some cases it may be possible to provide a balance sheet as proof, but if the balance sheet is weak or time is needed during the transaction, it is possible to go to bank guarantee providers who work with you to provide their funds in what is known as “leasing.”
The whole process is similar to any commercial leasing arrangement, the leasing company gives you access to their asset in return for a fee and at the end of the lease term; the asset reverts to the leasing company. You have had access to the asset and they charge a fee for the service.
In a sense this is the way it works but it is actually a misnomer to call it a lease as no leasing actually happens. A transfer of collateral agreement is entered into between the company who wishes to bolster their balance sheet and the bank guarantee providers, the assets are placed in the bank under the name of the client but they are frozen and cannot be used for anything but to bolster the situation when proof of funds is required.
The term of the “lease” is normally quite short, as little as 15 or 30 days is usually sufficient, however, the arrangement can be for a much longer period if need be. Regardless of the time frame, at the end of the agreement the collateral is returned to the provider.
These arrangements are very common when it is necessary to qualify for financing, to prove the net worth of the entity, in commodities trading and real estate.
They are very evident in real estate transactions where the buyer has the cash but it is not yet liquid. Perhaps the money required to pay for the house in its entirety is tied up in CDs or other investment vehicles that cannot be touched for a certain time. Under these circumstances the seller of the property will b quite content with a bank guarantee that states that there is money available. This money is then leased from companies that provide capital funds, it is returned to the provider once liquidity is achieved.
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