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

Once in awhile on this blog site, we address regularly asked concerns about our most popular financing alternatives so you can get a much better understanding of the lots of services available to you and the advantages of each.

This month, we're focusing on the sale-leaseback, which is a financing alternative lots of services might have an interest in today thinking about 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 sell an asset you own to a leasing business or lending institution and after that rent it back from them. This is how sale-leasebacks usually operate in industrial realty, where companies typically utilize them to maximize capital that's bound in a genuine estate investment.

In property sale-leasebacks, the financing partner typically develops a triple net lease (which is a lease that needs the tenant to pay residential or commercial property expenses) for the business that just sold the residential or commercial property. The financing partner ends up being the property manager and collects lease payments from the previous residential or commercial property owner, who is now the renter.

However, devices sale-leasebacks are more flexible. In an equipment sale-leaseback, you can promise the asset as collateral and obtain the funds through a $1 buyout lease or devices financing contract. Depending upon the kind of transaction that fits your requirements, the resulting lease might be an operating lease or a capital lease

Although genuine estate business frequently use sale-leasebacks, company owners in lots of other markets may not understand about this funding option. However, you can do a sale-leaseback deal with all sorts of possessions, consisting of industrial devices like building and construction 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 piece of devices you already own? The main factor is cash flow. When your company needs working capital immediately, a sale-leaseback plan lets you get both the cash you need to run and the devices you require to get work done.

So, let's state your business does not have a line of credit (LOC), or you need more working capital than your LOC can offer. Because case, you can utilize a sale-leaseback to raise capital so you can kick off a new line of product, purchase out a partner, or prepare yourself for the season in a seasonal organization, amongst other factors.

How Do Equipment Sale-Leasebacks Work?

There are great deals of different methods to structure sale-leaseback offers. If you work with an independent financing partner, they need to 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 offer the equipment to your funding partner, you'll participate in a lease contract and make payments for a time period (lease term) that you both settle on. At this time, you end up being the lessee (the party that pays for making use of the asset), and your financing partner ends up being the lessor (the celebration that receives payments).

Sale-leasebacks typically involve repaired lease payments and tend to have longer terms than lots of other types 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 reveal up) or capital lease (it will).

The major distinction between a credit line (LOC) and a sale-leaseback is that an LOC is typically secured by short-term possessions, such as receivables and inventory, and the interest rate modifications with time. An organization will draw on an LOC as required to support present capital requirements.

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

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

How Much Financing Will I Get?

Just how much money you get for the sale of the equipment depends upon the equipment, the monetary strength of your service, and your funding partner. It prevails for a devices sale-leaseback to offer in between 50-100 percent of the equipment's auction worth in cash, but that figure might change based on a large range of factors. There's no one-size-fits-all guideline we can offer; the very best way to get an idea of just how much capital you'll receive is to get in touch with a funding partner and speak with them about your special circumstance.

What Types of Equipment Can I Use to Get a Sale-Leaseback?

Frequently, services that utilize sale-leasebacks are business that have high-cost set assets, like residential or commercial property or big and costly tools. That's why businesses in the property market love sale-leaseback financing: land is the supreme high-cost set property. However, sale-leasebacks are also used by business in all sorts of other markets, including building, transport, production, and agriculture.

When you're attempting to decide whether a tool is a great prospect for a sale-leaseback, believe huge. Large trucks, valuable pieces of heavy machinery, and titled rolling stock can all work. However, collections of small items probably won't do, even if they amount to a large quantity. For example, your funding partner probably will not wish to deal with the headache of evaluating and potentially selling stacks of secondhand workplace devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback could look really similar to a loan if it's structured as a $1 buyout lease or equipment financing arrangement (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it could look very different from a loan. Since these are really various products, attempting to compare them resembles comparing apples and oranges. It's not a matter of what item is better - it has to do with what fits the requirements of your business.

With that said, sale-leaseback transactions do have some distinct advantages.

Tax Benefits

With a sale-leaseback, your business may receive Section 179 advantages and bonus devaluation, amongst other prospective advantages and deductions. Often, your funding partner will have the ability to make your sale-leaseback really 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 devices to the table, your financing partner does not need to handle as much danger. If you own valuable equipment, then you may be able to receive a sale-leaseback even if your company has undesirable products on its credit report or is a start-up organization with little to no credit report.

Favorable Terms

Since you're pertaining to the deal with collateral (the equipment) in hand, you may be able to shape the regards to your sale-leaseback contract. You must be able to work with your funding partner to get payment amounts, funding rates, and lease terms that conveniently satisfy your needs.

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

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

- You require to own the devices outright. The equipment must be devoid of liens and ought to be either entirely settled or very close.
- The devices needs to have a resale or auction worth. If the equipment doesn't have any fair market value, then your financing partner will not have a reason to buy it from you.

What Happens After the Lease Term?

A sale-leaseback is normally a long-term lease, so you'll have time to decide what you want to do when the lease ends. At the end of the sale-leaseback term, you'll have a couple of alternatives, which will depend on how the transaction was structured to begin. If your sale-leaseback is an operating lease where you quit ownership of the asset, these are the typical end of term alternatives:

- Deal with your funding partner to renew the lease.
- Return the devices to your funding partner, without any additional commitments
- Negotiate a purchase rate and buy the devices back from your financing partner

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

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 extra option, you can have your financing partner structure the sale-leaseback to consist of an early buyout option. This alternative will let you bought the equipment at an agreed-upon set price before your lease term ends.

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

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

The material supplied here is for informative functions just. For individualized financial suggestions, please contact our business financing experts.