What Is a Sale-Leaseback, and Why Would I Want One?
Occasionally on this blog site, we respond to frequently asked concerns about our most popular funding choices so you can get a much better understanding of the lots of services readily available to you and the benefits of each.
This month, we're focusing on the sale-leaseback, which is a funding alternative numerous businesses may be interested in today thinking about the existing 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 sell a possession you own to a leasing company or lender and then rent it back from them. This is how sale-leasebacks normally operate in commercial realty, where business frequently utilize them to release up capital that's bound in a property investment.
In realty sale-leasebacks, the financing partner generally produces a triple net lease (which is a lease that requires the tenant to pay residential or commercial property costs) for the business that simply sold the residential or commercial property. The financing partner ends up being the property manager and gathers rent payments from the previous residential or commercial property owner, who is now the tenant.
However, devices sale-leasebacks are more flexible. In an equipment sale-leaseback, you can promise the possession as security and borrow the funds through a $1 buyout lease or equipment finance arrangement. Depending on the type of deal that fits your requirements, the resulting lease might be an operating lease or a capital lease
Although realty companies regularly use sale-leasebacks, business owners in numerous other markets may not understand about this financing alternative. However, you can do a sale-leaseback transaction with all sorts of possessions, including commercial devices like construction equipment, farm equipment, production and storage assets, energy options, and more.
Why Would I Want a Sale-Leaseback?
Why would you wish to rent a piece of equipment you currently own? The primary reason is cash flow. When your business requires working capital immediately, a sale-leaseback arrangement lets you get both the money you need to run and the equipment you require to get work done.
So, let's state your business does not have a line of credit (LOC), or you require more working capital than your LOC can offer. In that case, you can use a sale-leaseback to raise capital so you can begin a new line of product, buy out a partner, or get prepared for the season in a seasonal organization, among other factors.
How Do Equipment Sale-Leasebacks Work?
There are great deals of various ways to structure sale-leaseback deals. If you deal with an independent funding partner, they should be able to develop a solution that's customized to your company and assists you accomplish your short-term and long-lasting objectives.
After you offer the devices to your funding partner, you'll enter into 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 celebration that pays for the use of the property), and your financing partner ends up being the lessor (the party that receives payments).
Sale-leasebacks usually involve fixed lease payments and tend to have longer terms than many other kinds of financing. Whether the sale-leaseback appears as a loan on your business's balance sheet depends on whether the transaction was structured as an operating lease (it won't show up) or capital lease (it will).
The significant difference in between a line of credit (LOC) and a sale-leaseback is that an LOC is normally secured by short-term properties, such as accounts receivable and stock, and the rate of interest modifications with time. A service will make use of an LOC as required to support current capital requirements.
Meanwhile, sale-leasebacks typically involve a fixed term and a set rate. So, in a common sale-leaseback, your business would get a lump amount of money at the closing and then pay it back in month-to-month 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 devices, the monetary strength of your organization, and your funding partner. It's common for a devices sale-leaseback to supply in between 50-100 percent of the equipment's auction value in money, however that figure could change based upon a wide range of factors. There's no one-size-fits-all guideline we can offer; the best method to get an idea of how much capital you'll get is to get in touch with a financing partner and speak with them about your distinct circumstance.
What Kinds Of Equipment Can I Use to Get a Sale-Leaseback?
Usually, businesses that use sale-leasebacks are business that have high-cost set possessions, like residential or commercial property or large and pricey pieces of equipment. That's why businesses in the property industry love sale-leaseback financing: land is the supreme high-cost fixed property. However, sale-leasebacks are likewise used by companies in all sorts of other industries, including building, transportation, production, and agriculture.
When you're attempting to choose whether a piece of devices is a good candidate for a sale-leaseback, think big. Large trucks, important pieces of heavy machinery, and titled rolling stock can all work. However, collections of little products most likely won't do, even if they amount to a big quantity. For instance, your funding partner more than likely will not desire to handle the headache of evaluating and potentially selling stacks of secondhand office equipment.
Is a Sale-Leaseback Better Than a Loan?
A sale-leaseback could look extremely comparable to a loan if it's structured as a $1 buyout lease or devices finance 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 very various products, trying to compare them resembles comparing apples and oranges. It's not a matter of what item is better - it's about what fits the requirements of your business.
With that said, sale-leaseback deals do have some distinct benefits.
Tax Benefits
With a sale-leaseback, your company may certify for Section 179 benefits and reward devaluation, to name a few possible advantages and reductions. Often, your funding partner will have the ability to make your sale-leaseback extremely tax-friendly. Depending on how your sale-leaseback is structured, you may have the ability 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 funding partner doesn't need to handle as much risk. If you own valuable devices, then you may be able to qualify for a sale-leaseback even if your business has unfavorable items on its credit report or is a start-up company with little to no credit report.
Favorable Terms
Since you're coming to the transaction with collateral (the equipment) in hand, you may be able to form the terms of your sale-leaseback agreement. You ought to be able to deal with your financing partner to get payment quantities, financing rates, and lease terms that comfortably meet your needs.
What Are the Restrictions and Requirements for a Sale-Leaseback?
You do require to satisfy two primary conditions to receive a sale-leaseback. Those conditions are:
- You need to own the devices outright. The equipment should be free of liens and must be either completely paid off or really close.
- The equipment needs to have a resale or auction value. If the equipment does not have any reasonable market price, then your financing partner will not have a factor to purchase it from you.
What Happens After the Lease Term?
A sale-leaseback is typically 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 options, 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 options:
- Deal with your funding partner to restore the lease.
- Return the devices to your financing partner, with no additional responsibilities
- Negotiate a purchase rate and purchase the equipment back from your financing partner
If your sale-leaseback was structured as a capital lease, you may own the devices totally free and clear at the end of the lease term, without any additional responsibilities.
It depends on you and your funding partner to choose between these choices based upon what makes one of the most sense for your company at that time. As an extra alternative, you can have your funding partner structure the sale-leaseback to consist of an early buyout choice. This choice will let you redeemed the devices at an agreed-upon fixed rate before your lease term ends.
Contact Team Financial Group to Learn About Your Business Financing Options
Have questions about whether you certify for equipment sale-leaseback funding or any other type of financing? We're here to help! Call us today at 616-735-2393 or fill out our contact type to talk with a financing expert from Team Financial Group. And if you're all set to make an application for financing, complete our fast online application and let us do the rest.
The material offered here is for informative purposes just. For individualized monetary advice, please contact our commercial financing specialists.
