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

Once in awhile on this blog site, we answer frequently asked questions about our most popular funding alternatives so you can get a much better understanding of the many solutions offered to you and the benefits of each.

This month, we're focusing on the sale-leaseback, which is a financing option numerous services may be interested in today considering the existing state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is an unique type of equipment 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 lease it back from them. This is how sale-leasebacks usually operate in commercial genuine estate, where companies typically use them to maximize capital that's connected up in a genuine estate financial investment.

In realty sale-leasebacks, the funding partner usually produces a triple net lease (which is a lease that requires the tenant to pay residential or commercial property expenses) for the business that simply sold the residential or commercial property. The financing partner ends up being the landlord and gathers lease payments from the previous residential or commercial property owner, who is now the occupant.

However, devices sale-leasebacks are more flexible. In an equipment sale-leaseback, you can pledge the possession as security and obtain the funds through a $1 buyout lease or devices financing arrangement. 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, organization owners in lots of other markets may not understand about this financing choice. However, you can do a sale-leaseback deal with all sorts of assets, including industrial equipment like building devices, farm equipment, manufacturing and storage properties, energy options, and more.

Why Would I Want a Sale-Leaseback?

Why would you wish to rent a tool you already own? The main factor is capital. When your business requires working capital right now, a sale-leaseback arrangement lets you get both the cash you require to run and the equipment you need to get work done.

So, let's state your company doesn't have a credit line (LOC), or you need more operating capital than your LOC can provide. Because case, you can use a sale-leaseback to raise capital so you can begin a brand-new item line, buy out a partner, or get ready for the season in a seasonal organization, to name a few reasons.

How Do Equipment Sale-Leasebacks Work?

There are lots of different methods to structure sale-leaseback deals. If you deal with an independent financing partner, they must be able to produce a service that's customized to your business and helps you attain your short-term and long-lasting objectives.

After you sell the equipment to your financing partner, you'll enter into a lease contract and make payments for a time period (lease term) that you both agree on. At this time, you become the lessee (the party that pays for the usage of the possession), and your financing partner becomes the lessor (the party that gets payments).

Sale-leasebacks typically involve 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 business's balance sheet depends upon whether the deal was structured as an operating lease (it won't show up) or capital lease (it will).

The major distinction between a line of credit (LOC) and a sale-leaseback is that an LOC is typically secured by short-term properties, such as accounts receivable and stock, and the rate of interest changes gradually. A business will make use of an LOC as required to support existing capital requirements.

Meanwhile, sale-leasebacks usually involve a set term and a fixed rate. So, in a typical sale-leaseback, your business would receive a lump amount of money at the closing and then pay it back in regular monthly installations in time.

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

Just How Much Financing Will I Get?

Just how much cash you receive for the sale of the equipment depends upon the devices, the financial strength of your company, and your financing partner. It's common for a devices sale-leaseback to provide in between 50-100 percent of the devices's auction value in money, but that figure could change based on a broad variety of elements. There's no one-size-fits-all rule we can supply; the very best way to get an idea of how much capital you'll receive is to call a funding partner and talk with them about your special scenario.

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

Most typically, services that use sale-leasebacks are companies that have high-cost fixed possessions, like residential or commercial property or large and expensive tools. That's why companies in the property industry love sale-leaseback financing: land is the ultimate high-cost set property. However, sale-leasebacks are likewise utilized by companies in all sorts of other markets, consisting of construction, transport, production, and agriculture.

When you're trying to choose whether a tool is a great prospect for a sale-leaseback, think big. Large trucks, important pieces of heavy equipment, and titled rolling stock can all work. However, collections of small products probably won't do, even if they include up to a big quantity. For example, your financing partner probably will not desire to handle the headache of evaluating and potentially offering piles of pre-owned workplace equipment.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback might look really similar to a loan if it's structured as a $1 buyout lease or equipment finance contract (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it might look really various from a loan. Since these are extremely various items, trying to compare them resembles comparing apples and oranges. It's not a matter of what product is better - it has to do with what fits the requirements of your organization.

With that said, sale-leaseback deals do have some unique benefits.

Tax Benefits

With a sale-leaseback, your business might receive Section 179 benefits and benefit devaluation, amongst other prospective benefits and reductions. Often, your financing partner will have the ability to make your sale-leaseback really tax-friendly. Depending upon how your sale-leaseback is structured, you may be able to write off 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 have to take on as much threat. If you own important devices, then you may be able to get approved for a sale-leaseback even if your service has unfavorable items on its credit report or is a startup business with little to no credit history.

Favorable Terms

Since you're pertaining to the deal with collateral (the devices) in hand, you may have the ability to shape the regards to your sale-leaseback contract. You ought to be able to work with your financing partner to get payment amounts, financing rates, and lease terms that easily satisfy your requirements.

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

You do require to meet two primary conditions to get approved for a sale-leaseback. Those conditions are:

- You require to own the devices outright. The equipment should be without liens and should be either totally paid off or really close.
- The devices needs to have a resale or auction value. If the devices does not have any reasonable market price, then your financing partner won't have a reason to buy it from you.

What Happens After the Lease Term?

A sale-leaseback is typically a long-lasting lease, so you'll have time to decide what you wish 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 property, these are the typical end of term alternatives:

- Work with your financing partner to renew the lease.
- Return the equipment to your funding partner, with no additional obligations
- Negotiate a purchase price and buy the devices back from your financing partner

If your sale-leaseback was structured as a capital lease, you might own the devices complimentary and clear at the end of the lease term, with no additional responsibilities.

It depends on you and your financing partner to decide in between these options based upon what makes one of the most sense for your business at that time. As an extra option, you can have your financing partner structure the sale-leaseback to consist of an early buyout choice. This alternative will let you repurchase the devices at an agreed-upon set rate before your lease term ends.

Contact Team Financial Group to Learn About Your Business Financing Options

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

The content supplied here is for informational purposes only. For individualized financial advice, please contact our commercial financing specialists.