What Is a Sale-Leaseback, and Why Would I Want One?

Every now and then on this blog site, we respond to regularly asked questions about our most popular funding alternatives so you can get a much better understanding of the many options available to you and the advantages of each.

This month, we're focusing on the sale-leaseback, which is a financing option numerous businesses might have an interest in today considering the current state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is a special kind of devices funding. In a sale-leaseback, sometimes called a sale-and-leaseback, you can sell a possession you own to a leasing company or lender and then rent it back from them. This is how sale-leasebacks usually work in business realty, where companies typically utilize them to maximize capital that's connected up in a property financial investment.

In realty sale-leasebacks, the financing partner normally creates a triple net lease (which is a lease that requires the occupant to pay residential or commercial property expenditures) for the business that simply offered the residential or commercial property. The funding partner ends up being the landlord and collects lease payments from the former residential or commercial property owner, who is now the occupant.

However, equipment sale-leasebacks are more versatile. In an equipment sale-leaseback, you can pledge the asset as collateral and borrow the funds through a $1 buyout lease or equipment finance agreement. Depending on the type of transaction that fits your needs, the resulting lease might be an operating lease or a capital lease

Although property business frequently utilize sale-leasebacks, service owners in many other markets might not understand about this financing alternative. However, you can do a sale-leaseback deal with all sorts of assets, consisting of business devices like building equipment, farm machinery, manufacturing and storage possessions, energy services, and more.

Why Would I Want a Sale-Leaseback?

Why would you want to lease a piece of equipment you already own? The primary reason is capital. When your company requires working capital right now, a sale-leaseback plan lets you get both the money you require to run and the equipment you require to get work done.

So, let's state your business does not have a line of credit (LOC), or you require more working capital than your LOC can provide. Because case, you can utilize a sale-leaseback to raise capital so you can start a brand-new item line, purchase out a partner, or get ready for the season in a seasonal company, to name a few factors.

How Do Equipment Sale-Leasebacks Work?

There are lots of various methods to structure sale-leaseback offers. If you deal with an independent financing partner, they must be able to develop a service that's tailored to your company and assists you accomplish your short-term and long-term objectives.

After you sell the equipment to your funding partner, you'll participate in a lease arrangement and pay for a time period (lease term) that you both settle on. At this time, you end up being the lessee (the party that spends for the usage of the possession), and your funding partner ends up being the lessor (the party that receives payments).

Sale-leasebacks generally include fixed lease payments and tend to have longer terms than many other kinds of funding. Whether the sale-leaseback shows up as a loan on your company's balance sheet depends on whether the deal was structured as an operating lease (it won't reveal up) or capital lease (it will).

The significant difference between a credit line (LOC) and a sale-leaseback is that an LOC is usually protected by short-term assets, such as receivables and stock, and the interest rate changes in time. A service will make use of an LOC as needed to support present money circulation requirements.

Meanwhile, sale-leasebacks generally involve a set term and a fixed rate. So, in a common sale-leaseback, your business would get a swelling amount of money at the closing and after that pay it back in month-to-month installments in time.

RELATED: Business Health: How Equipment Financing Can Help Your Cash Flow

How Much Financing Will I Get?

Just how much money you receive for the sale of the equipment depends upon the devices, the monetary strength of your service, and your financing partner. It prevails for a devices sale-leaseback to offer in between 50-100 percent of the equipment's auction value in cash, but that figure could alter based upon a vast array of factors. There's no one-size-fits-all guideline we can offer; the very best way to get a concept of just how much capital you'll receive is to contact a funding partner and speak to them about your distinct scenario.

What Kinds Of Equipment Can I Use to Get a Sale-Leaseback?

Frequently, companies that use sale-leasebacks are companies that have high-cost fixed properties, like residential or commercial property or big and pricey pieces of equipment. That's why companies in the realty industry love sale-leaseback financing: land is the supreme high-cost fixed property. However, sale-leasebacks are also used by business in all sorts of other industries, consisting of construction, transportation, manufacturing, and farming.

When you're trying to choose whether a tool is a great candidate for a sale-leaseback, think big. Large trucks, important pieces of heavy equipment, and entitled rolling stock can all work. However, collections of small items most likely won't do, even if they amount to a big quantity. For example, your funding partner probably won't desire to handle the headache of examining and potentially selling stacks of secondhand workplace devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback could look extremely comparable to a loan if it's structured as a $1 buyout lease or equipment financing agreement (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it could look extremely different from a loan. Since these are really various products, trying to compare them is like comparing apples and oranges. It's not a matter of what product is much better - it has to do with what fits the requirements of your company.

With that stated, sale-leaseback transactions do have some unique benefits.

Tax Benefits

With a sale-leaseback, your business might certify for Section 179 advantages and perk depreciation, to name a few potential advantages and reductions. Often, your financing partner will have the ability to make your sale-leaseback extremely tax-friendly. Depending on how your sale-leaseback is structured, you may be able to cross out all the payments on your taxes.

RELATED: Get These Tax Benefits With Commercial Equipment Financing

Lower Bar to Qualify

Since you're bringing the equipment to the table, your financing partner does not need to handle as much risk. If you own valuable equipment, then you may be able to receive a sale-leaseback even if your company has unfavorable products on its credit report or is a startup service with little to no credit report.

Favorable Terms

Since you're concerning the deal with collateral (the devices) in hand, you may have the ability to shape the regards to your sale-leaseback arrangement. You need to have the ability to work with your funding partner to get payment amounts, funding rates, and lease terms that easily fulfill your requirements.

What Are the Restrictions and Requirements for a Sale-Leaseback?

You do need to fulfill 2 primary conditions to receive a sale-leaseback. Those conditions are:

- You require to own the devices outright. The equipment should be complimentary of liens and need to be either entirely paid off or extremely close.
- The devices requires to have a resale or auction value. If the equipment doesn't have any reasonable market worth, then your funding partner won't have a factor to buy it from you.

What Happens After the Lease Term?

A sale-leaseback is generally a long-term lease, so you'll have time to choose what you want to do when the lease ends. At the end of the sale-leaseback term, you'll have a couple of options, which will depend upon how the deal was structured to start. If your sale-leaseback is an operating lease where you gave up ownership of the possession, these are the typical end of term alternatives:

- Work with your funding partner to restore the lease.
- Return the devices to your funding partner, with no additional responsibilities
- Negotiate a purchase rate and purchase the devices back from your financing partner

If your sale-leaseback was structured as a capital lease, you may own the equipment complimentary and clear at the end of the lease term, with no further obligations.

It's up to you and your financing partner to choose between these options based on what makes the many sense for your service at that time. As an additional option, you can have your funding partner structure the sale-leaseback to consist of an early buyout option. This alternative will let you repurchase the devices at an agreed-upon fixed rate before your lease term ends.

Contact Team Financial Group to Learn More About Your Business Financing Options

Have concerns about whether you qualify for equipment sale-leaseback financing or any other type of funding? We're here to assist! Call us today at 616-735-2393 or complete our contact kind to talk with a funding specialist from Team Financial Group. And if you're ready to obtain financing, submit our quick online application and let us do the rest.

The content supplied here is for informative functions only. For individualized monetary guidance, please contact our industrial financing professionals.