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

Occasionally on this blog site, we respond to frequently asked questions about our most popular funding choices so you can get a much better understanding of the many services readily available to you and the benefits of each.

This month, we're focusing on the sale-leaseback, which is a funding choice numerous companies may have an interest in right now considering the existing state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is a special kind of equipment financing. In a sale-leaseback, often called a sale-and-leaseback, you can offer a property you own to a leasing business or lender and then rent it back from them. This is how sale-leasebacks usually operate in business genuine estate, where business often use them to free up capital that's bound in a genuine estate financial investment.

In realty sale-leasebacks, the financing partner normally creates 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 funding partner becomes the property manager and gathers lease payments from the previous residential or commercial property owner, who is now the tenant.

However, devices sale-leasebacks are more flexible. In a devices sale-leaseback, you can pledge the property as collateral and obtain the funds through a $1 buyout lease or devices finance arrangement. Depending upon the kind of deal that fits your needs, the resulting lease might be an operating lease or a capital lease

Although realty business regularly use sale-leasebacks, company owner in many other industries may not understand about this financing alternative. However, you can do a sale-leaseback deal with all sorts of assets, including business devices like construction devices, farm machinery, production and storage possessions, energy solutions, and more.

Why Would I Want a Sale-Leaseback?

Why would you wish to lease a piece of equipment you already own? The primary reason is capital. When your business requires working capital immediately, a sale-leaseback plan lets you get both the cash you require to run and the devices you require to get work done.

So, let's say your company does not have a credit line (LOC), or you require more working capital than your LOC can offer. In that case, you can utilize a sale-leaseback to raise capital so you can start a brand-new item line, buy out a partner, or prepare yourself for the season in a seasonal company, among other reasons.

How Do Equipment Sale-Leasebacks Work?

There are great deals of various ways to structure sale-leaseback offers. If you deal with an independent funding partner, they should have the ability to create an option that's customized to your company and assists you attain your short-term and long-term objectives.

After you sell the devices to your financing partner, you'll enter into a lease arrangement and pay for a time period (lease term) that you both settle on. At this time, you become the lessee (the party that pays for using the property), and your financing partner ends up being the lessor (the celebration that gets payments).

Sale-leasebacks usually include repaired lease payments and tend to have longer terms than lots of other kinds of financing. Whether the sale-leaseback appears as a loan on your company's balance sheet depends upon whether the deal was structured as an operating lease (it will not show up) or capital lease (it will).

The significant difference between a credit line (LOC) and a sale-leaseback is that an LOC is typically secured by short-term possessions, such as balance dues and stock, and the rate of interest changes with time. An organization will draw on an LOC as needed to support existing capital requirements.

Meanwhile, sale-leasebacks usually involve a fixed term and a set rate. So, in a typical sale-leaseback, your company would get a lump amount of money at the closing and after that pay it back in monthly installments gradually.

RELATED: Business Health: How Equipment Financing Can Help Your Capital

How Much Financing Will I Get?

How much money you get for the sale of the devices depends upon the devices, the monetary strength of your organization, and your funding partner. It prevails for an equipment sale-leaseback to offer in between 50-100 percent of the devices's auction value in money, but that figure might alter based upon a wide variety of elements. There's no one-size-fits-all rule we can supply; the best way to get an idea of just how much capital you'll receive is to contact a financing partner and speak with them about your special situation.

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

Usually, businesses that utilize sale-leasebacks are business that have high-cost set properties, like residential or commercial property or big and costly tools. That's why services in the real estate market love sale-leaseback funding: land is the ultimate high-cost fixed property. However, sale-leasebacks are likewise utilized by business in all sorts of other industries, including construction, transport, production, and agriculture.

When you're trying to choose whether a piece of equipment is an excellent candidate for a sale-leaseback, think big. Large trucks, important pieces of heavy machinery, and titled rolling stock can all work. However, collections of small products most likely will not do, even if they add up to a large quantity. For example, your financing partner probably won't wish to handle the headache of evaluating and possibly offering stacks of used workplace equipment.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback might look very similar 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 different products, trying to compare them is like comparing apples and oranges. It's not a matter of what item is better - it's about what fits the needs of your company.

With that stated, sale-leaseback deals do have some distinct advantages.

Tax Benefits

With a sale-leaseback, your company may receive Section 179 advantages and reward devaluation, to name a few potential advantages and reductions. Often, your funding partner will be able to make your sale-leaseback very tax-friendly. Depending on how your sale-leaseback is structured, you may be able to compose 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 devices to the table, your funding partner does not have to take on as much risk. If you own important equipment, then you might have the ability to receive a sale-leaseback even if your organization has undesirable products on its credit report or is a startup business with little to no credit report.

Favorable Terms

Since you're coming to the deal with collateral (the devices) in hand, you might be able to form the terms of your sale-leaseback contract. You need to have the ability to work with your financing partner to get payment amounts, funding rates, and lease terms that easily fulfill your needs.

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

You do need to meet 2 main conditions to get approved for a sale-leaseback. Those conditions are:

- You need to own the devices outright. The equipment must be devoid of liens and must be either totally paid off or really close.
- The equipment needs to have a resale or auction value. If the equipment does not have any fair market value, then your funding partner will not have a factor to buy it from you.

What Happens After the Lease Term?

A sale-leaseback is typically a long-term 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 few alternatives, which will depend on how the transaction was structured to begin. If your sale-leaseback is an operating lease where you offered up ownership of the possession, these are the typical end of term options:

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

If your sale-leaseback was structured as a capital lease, you may own the devices complimentary and clear at the end of the lease term, without any more obligations.

It's up to you and your funding partner to choose in between these choices based upon what makes one of the most sense for your service at that time. As an additional choice, you can have your financing partner structure the sale-leaseback to include an early buyout choice. This choice will let you repurchase the devices at an agreed-upon fixed price before your lease term ends.

Contact Team Financial Group to Learn About Your Business Financing Options

Have concerns 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 complete our contact form to talk with a funding expert from Team Financial Group. And if you're ready to use for financing, submit our quick online application and let us do the rest.

The content offered here is for informational functions just. For customized financial advice, please contact our business financing specialists.