Each time we post on this site, we respond to frequently asked questions on our most sought-after financing options to help you gain more information about the various options that are available and the advantages of each.
In this month’s issue, we will focus on the Equipment Sale-Leaseback. It’s a choice that many businesses might be thinking about.
What is an Equipment Sale-Leaseback?
An Equipment Sale-Leaseback is a distinct kind of financing for equipment. When you use a sale-leaseback method, often known as a sale-and-leaseback, you can sell the asset you have to a leasing company or lender and lease it back to them. Firms often utilize them to release capital for real estate investment.
In leasebacks for real estate, the financing partner usually sets up the triple net lease for the business that just closed on the property. The tenant is responsible for all of the property’s costs. The financing partner takes over as owner of the property, takes rent from the property’s previous owner, and is now the tenant.
However, they have more flexibility. With a leaseback, you can use an asset as security to borrow money to buy equipment. You can do this through a $1 purchase lease or a financing agreement. Based on the type of deal that meets your requirements, the lease may be either an operating or a capital lease.
Real estate companies often use sale-leasebacks, but people in other industries may not know about this way to get money. But, you can make an offer-leaseback using all kinds of assets, including commercial equipment, such as construction equipment and farm machines, manufacturing and storage assets, energy solutions, and many more.
Why would I want an Offer-Leaseback?
Why would you want to lease an item of equipment you have? The primary factor is the cash flow. If your business requires urgent working capital, a sale-leaseback agreement lets you access the cash you need to run your business and the equipment you need to accomplish your tasks.
So, suppose your business doesn’t have a line of credit (LOC) or requires more working capital than the LOC will provide. In this case, you could use sales leasebacks to raise funds to launch a new product line, buy out partners, or be prepared for the holiday season in a seasonal company, as well as other motives.
How do Equipment Sale-Leasebacks Function?
There are many ways to structure sales-leaseback agreements. If you’re working with an independent financial partner, They should be able to develop an arrangement tailored to your company’s needs and help you reach your short-term and long-term objectives.
Once you’ve sold the machine to your finance partner, you’ll sign an agreement to lease the equipment and make payments over a period (lease term) that you and your partner can agree on. Currently, you’re the lessee (the one responsible for using the asset), and your financing partner will become the lessor (who receives the payments).
In contrast, sale-leasebacks typically have an agreed-upon term and fixed rate. Therefore, in the typical sale-leaseback arrangement, your business would be given an unspecified amount of money at closing and repay it in monthly instalments.
What is the amount of financing I can Receive?
The amount of cash you get when you sell the equipment is contingent upon the type of equipment and the financial stability of your company, as well as the financing partner you have. It is common for an equipment leaseback to offer between 50 and 100 per cent of the price at auction in cash; however, that number could vary according to a range of variables. We can offer no universally applicable rule; the most effective way to estimate the capital you’ll get is to contact a financing partner and discuss your specific circumstances.
What Kinds of Equipment Can I use to get a Leaseback Sale?
Most companies that use sale-leasebacks have fixed assets with high costs, such as property or large and costly machinery items. It is why companies in the real estate sector appreciate sale-leaseback financing because the land is the highest-cost fixed asset. But sale-leasebacks are utilized by businesses across many other industries, which include transportation, construction manufacturing, agriculture, and manufacturing.
If you’re trying to determine whether an item is suitable to lease back, look at the size. Large trucks, important pieces of heavy machinery, and even the rolling stock that is titled can be used in various ways. But collections of smaller objects won’t work even when they’re the same amount. For instance, your financing partner will probably not want to go through the burden of assessing and selling off piles of used office equipment.
Are Sale-Leasebacks better than A loan?
A sale-leaseback may look like a loan, especially if it is set up like a $1 buyout lease or an equipment financing agreement (EFA). Because they are two different items, comparing them is like comparing apples to oranges. It’s not about which one is better. It’s about what best suits your needs as a business.
However, sales-leaseback transactions have particular advantages.
Tax Benefits
You could qualify for Section 179 tax benefits, bonus depreciation, and other deductions and benefits through a sale leaseback. Typically your financier will be capable of making your sale-leaseback tax-friendly.
The lower bar is required to qualify.
Because you’re bringing the equipment, the financing partner doesn’t need to assume the same risk. If you have important equipment, you can get a sale-leaseback, even if your company has negative things on its credit report or is a start-up business with little or no credit background.
Favourable Terms
Because you’re entering the deal having the collateral (the apparatus) in the bank, it is possible to determine the terms of your leaseback agreement. You can negotiate with your finance partner to negotiate the payment amount, the financing rate, and lease agreements that satisfy your needs.
What are the restrictions and requirements for a Sale-Leaseback?
You must meet two conditions to qualify for the sale-leaseback. These conditions include:
- It is essential to own the equipment in full. The equipment should be free of liens and paid in full or at least very close.
- The equipment must have a resale or auction value. If the item does not have a fair market value, your finance partner cannot justify buying it from you.
What happens following the lease? What happens after the Lease’s Term?
A sale-leaseback typically is an extended lease. You’ll have plenty of time to determine what you’d like to do after the lease expires. If it’s an operating lease, in which you sold the ownership of the asset, these are typically the alternatives at the end of the term:
- It would help if you worked with your financing partner to extend the lease.
- The equipment can be returned to your finance partner without any additional obligations.
- Find a price for the purchase and purchase the equipment with your finance partner.
If a capital loan arranged the sale-leaseback, you might own the machine free and clear at the close of the lease period, with no obligations.
It’s up to you and your financial partner to determine which choices are best for your business. If you want to go further, ask your finance partner to structure the sale leaseback to include an early purchase option. It allows you to buy the equipment back at a fixed price before your lease expires.
Contact the Commercial Lending USA to Learn About your Business Financing Options
Are you eligible for equipment sale-leaseback financing or other types of financing? We’re here to assist you! Call us at (855) 365-9200 or submit this form to speak with a finance expert at Commercial Lending USA. If you’re ready to get credit, complete our easy online application, and we’ll take care of the rest.