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

Every so frequently on this blog, we answer frequently asked concerns about our most popular funding alternatives so you can get a better understanding of the many options available to you and the benefits of each.

This month, we're focusing on the sale-leaseback, which is a funding alternative numerous services may be interested in today thinking about the present state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is a distinct kind of devices funding. In a sale-leaseback, often called a sale-and-leaseback, you can offer a property you own to a leasing business or lending institution and then lease it back from them. This is how sale-leasebacks usually work in industrial realty, where business typically use them to maximize capital that's connected up in a real estate financial investment.

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

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

Although property companies frequently use sale-leasebacks, entrepreneur in lots of other industries might not know about this funding choice. However, you can do a sale-leaseback deal with all sorts of assets, including industrial equipment like construction devices, farm equipment, production and storage properties, energy services, and more.

Why Would I Want a Sale-Leaseback?

Why would you want to rent a piece of equipment you currently own? The primary factor is cash flow. When your business requires working capital right now, a sale-leaseback arrangement lets you get both the cash you require to operate and the devices you require to get work done.

So, let's state your company does not have a line of credit (LOC), or you require more working capital than your LOC can supply. Because case, you can utilize a sale-leaseback to raise capital so you can kick off a new item line, purchase out a partner, or prepare for the season in a seasonal service, among other factors.

How Do Equipment Sale-Leasebacks Work?

There are great deals of various methods to structure sale-leaseback offers. If you work with an independent financing partner, they should be able to develop a service that's customized to your company and helps you achieve your short-term and long-lasting objectives.

After you sell the devices to your funding partner, you'll enter into a lease arrangement and make payments for a time duration (lease term) that you both concur on. At this time, you end up being the lessee (the party that spends for the use of the possession), and your funding partner becomes the lessor (the party that receives payments).

Sale-leasebacks typically include fixed lease payments and tend to have longer terms than many other types 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 won't appear) or capital lease (it will).

The major distinction in between a credit line (LOC) and a sale-leaseback is that an LOC is usually secured by short-term properties, such as receivables and stock, and the interest rate changes gradually. A service will make use of an LOC as required to support current cash flow requirements.

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

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

How Much Financing Will I Get?

How much cash you receive for the sale of the equipment depends upon the devices, the financial strength of your business, and your financing partner. It prevails for a devices sale-leaseback to provide in between 50-100 percent of the equipment's auction worth in cash, but that figure could alter based on a large range of aspects. There's no one-size-fits-all guideline we can provide; the very best method to get an idea of how much capital you'll get is to call a funding partner and talk to them about your distinct circumstance.

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

Usually, services that use sale-leasebacks are business that have high-cost fixed assets, like residential or commercial property or large and expensive pieces of equipment. That's why organizations in the property market love sale-leaseback financing: land is the ultimate high-cost set asset. However, sale-leasebacks are likewise utilized by business in all sorts of other markets, consisting of construction, transport, manufacturing, and agriculture.

When you're attempting to choose whether a piece of equipment is a good candidate for a sale-leaseback, believe huge. Large trucks, valuable pieces of heavy equipment, and entitled rolling stock can all work. However, collections of small products most likely will not do, even if they add up to a big amount. For instance, your funding partner most likely will not wish to handle the headache of assessing and potentially offering stacks of used workplace devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback might look extremely similar 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 might look really different from a loan. Since these are very various products, attempting to compare them is like comparing apples and oranges. It's not a matter of what product is much better - it has to do with what fits the requirements of your organization.

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

Tax Benefits

With a sale-leaseback, your business might certify for Section 179 benefits and bonus offer devaluation, to name a few potential advantages and deductions. Often, your financing partner will have the ability to make your sale-leaseback extremely tax-friendly. Depending upon how your sale-leaseback is structured, you might 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 equipment to the table, your financing partner doesn't have to handle as much danger. If you own valuable devices, then you may be able to get approved for a sale-leaseback even if your company has unfavorable items on its credit report or is a start-up service with little to no credit rating.

Favorable Terms

Since you're concerning the transaction with security (the equipment) in hand, you may have the ability to form the regards to your sale-leaseback contract. You ought to have the ability to deal with your financing partner to get payment amounts, financing rates, and lease terms that conveniently meet your requirements.

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

You do need to meet two main conditions to certify for a sale-leaseback. Those conditions are:

- You need to own the equipment outright. The equipment must be complimentary of liens and need to be either completely settled or really close.
- The equipment requires to have a resale or auction value. If the equipment does not have any fair market value, then your funding partner won't have a reason to purchase it from you.

What Happens After the Lease Term?

A sale-leaseback is generally 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 options, which will depend upon how the deal was structured to start. If your sale-leaseback is an operating lease where you quit ownership of the asset, these are the common end of term options:

- Deal with your funding partner to restore the lease.
- Return the equipment to your financing partner, without any further responsibilities
- Negotiate a purchase rate and purchase the devices back from your funding 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 further obligations.

It's up to you and your financing partner to decide between these options based upon what makes the most sense for your company at that time. As an additional option, you can have your funding partner structure the sale-leaseback to include an early buyout alternative. This option will let you repurchase the devices at an agreed-upon fixed rate before your lease term ends.

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

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

The content supplied here is for informational purposes only. For personalized monetary recommendations, please contact our industrial financing experts.