What Is a Sale-Leaseback, and Why Would I Want One?
Every so frequently on this blog, we answer frequently asked questions about our most popular funding alternatives so you can get a better understanding of the numerous options available to you and the benefits of each.
This month, we're focusing on the sale-leaseback, which is a funding choice many companies may have an interest in right now considering the current state of the economy.
What Is a Sale-Leaseback?
A sale-leaseback is a distinct type of devices financing. In a sale-leaseback, in some cases called a sale-and-leaseback, you can offer an asset you own to a leasing company or lending institution and after that rent it back from them. This is how sale-leasebacks typically work in business realty, where companies typically use them to maximize capital that's connected up in a realty investment.
In realty sale-leasebacks, the financing partner generally produces a triple net lease (which is a lease that requires the renter to pay residential or commercial property expenditures) for the business that just offered the residential or commercial property. The financing partner ends up being the property manager 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 promise the possession as security and borrow the funds through a $1 buyout lease or devices financing arrangement. Depending on the type of deal that fits your requirements, the resulting lease could be an operating lease or a capital lease
Although property companies regularly utilize sale-leasebacks, entrepreneur in many other markets may not know about this financing option. However, you can do a sale-leaseback deal with all sorts of possessions, consisting of industrial equipment like building and construction devices, farm equipment, production and storage possessions, energy services, and more.
Why Would I Want a Sale-Leaseback?
Why would you wish to rent a piece of devices you currently own? The primary reason is capital. When your company requires working capital immediately, a sale-leaseback arrangement lets you get both the money you require to operate and the devices you need to get work done.
So, let's say your business doesn't have a line of credit (LOC), or you need more working capital than your LOC can supply. Because case, you can utilize a sale-leaseback to raise capital so you can begin a new line of product, buy out a partner, or get ready for the season in a seasonal company, to name a few reasons.
How Do Equipment Sale-Leasebacks Work?
There are lots of different ways to structure sale-leaseback offers. If you deal with an independent financing partner, they ought to be able to produce an option that's tailored to your business and helps you achieve your short-term and long-lasting objectives.
After you sell the equipment to your funding partner, you'll participate in a lease agreement and make payments for a time duration (lease term) that you both settle on. At this time, you become the lessee (the party that spends for using the asset), and your financing partner becomes the lessor (the party that receives payments).
Sale-leasebacks usually include repaired lease payments and tend to have longer terms than many other kinds of financing. Whether the sale-leaseback appears as a loan on your company's balance sheet depends on whether the transaction was structured as an operating lease (it will not appear) or capital lease (it will).
The significant difference between a line of credit (LOC) and a sale-leaseback is that an LOC is typically secured by short-term possessions, such as accounts receivable and stock, and the rates of interest modifications in time. A company will make use of an LOC as needed to support current cash flow needs.
Meanwhile, sale-leasebacks typically involve a set term and a fixed rate. So, in a normal sale-leaseback, your business would get a swelling sum of money at the closing and after that pay it back in monthly installations with time.
RELATED: Business Health: How Equipment Financing Can Help Your Cash Flow
Just How Much Financing Will I Get?
How much cash you receive for the sale of the devices depends upon the equipment, the financial strength of your company, and your financing partner. It prevails for an equipment sale-leaseback to supply in between 50-100 percent of the equipment's auction value in money, however that figure might change based upon a large range of factors. There's no one-size-fits-all rule we can provide; the finest method to get a concept of just how much capital you'll receive is to contact a funding partner and speak with them about your special circumstance.
What Kinds Of Equipment Can I Use to Get a Sale-Leaseback?
Most frequently, services that use sale-leasebacks are business that have high-cost set possessions, like residential or commercial property or large and expensive pieces of devices. That's why businesses in the property market love sale-leaseback funding: land is the supreme high-cost set asset. However, sale-leasebacks are also utilized by companies in all sorts of other industries, consisting of building and construction, transport, production, and agriculture.
When you're trying to choose whether a tool is a great candidate for a sale-leaseback, believe huge. Large trucks, important pieces of heavy machinery, and titled rolling stock can all work. However, collections of small items most likely won't do, even if they amount to a big amount. For instance, your funding partner more than likely will not want to handle the headache of evaluating and possibly selling piles of pre-owned workplace equipment.
Is a Sale-Leaseback Better Than a Loan?
A sale-leaseback might look really comparable to a loan if it's structured as a $1 buyout lease or equipment financing contract (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it could look very various from a loan. Since these are extremely different items, trying to compare them is like 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 business.
With that stated, sale-leaseback deals do have some unique advantages.
Tax Benefits
With a sale-leaseback, your business may qualify for Section 179 advantages and benefit depreciation, to name a few possible benefits and reductions. Often, your funding partner will have the ability to make your sale-leaseback extremely tax-friendly. Depending upon how your sale-leaseback is structured, you might have the ability 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 devices to the table, your funding partner doesn't have to handle as much danger. If you own important devices, then you may be able to get approved for a sale-leaseback even if your organization has undesirable items on its credit report or is a startup service with little to no credit report.
Favorable Terms
Since you're coming to the deal with collateral (the devices) in hand, you may be able to shape the regards to your sale-leaseback agreement. You need to have the ability to deal with your financing partner to get payment quantities, funding rates, and lease terms that conveniently satisfy your requirements.
What Are the Restrictions and Requirements for a Sale-Leaseback?
You do need to meet two main conditions to receive a sale-leaseback. Those conditions are:
- You require to own the devices outright. The equipment must be free of liens and ought to be either entirely paid off or very close.
- The devices needs to have a resale or auction value. If the devices doesn't have any fair market price, then your funding partner will not have a factor to acquire 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 wish to do when the lease ends. At the end of the sale-leaseback term, you'll have a few alternatives, which will depend upon how the transaction was structured to start. If your sale-leaseback is an operating lease where you quit ownership of the possession, these are the typical end of term choices:
- Work with your financing partner to restore the lease.
- Return the equipment to your financing partner, with no additional responsibilities
- Negotiate a purchase rate and buy the equipment back from your funding partner
If your sale-leaseback was structured as a capital lease, you may own the devices free and clear at the end of the lease term, with no more commitments.
It's up to you and your funding partner to choose between these choices based upon what makes one of the most sense for your organization at that time. As an additional alternative, you can have your funding partner structure the sale-leaseback to include an early buyout option. This alternative will let you redeemed the devices at an agreed-upon set price before your lease term ends.
Contact Team Financial Group to Learn About Your Business Financing Options
Have concerns about whether you receive devices sale-leaseback funding or any other type of financing? We're here to assist! Call us today at 616-735-2393 or complete our contact kind to talk with a funding expert from Team Financial Group. And if you're ready to apply for financing, complete our fast online application and let us do the rest.
The material offered here is for informational purposes just. For individualized monetary recommendations, please contact our commercial financing professionals.
