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

Occasionally on this blog, we respond to regularly asked questions about our most popular funding choices so you can get a much better understanding of the lots of solutions readily available to you and the advantages of each.

This month, we're concentrating on the sale-leaseback, which is a financing option numerous businesses might have an interest in today considering the present state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is a special type of devices financing. In a sale-leaseback, often called a sale-and-leaseback, you can offer a property you own to a leasing business or lender and then lease it back from them. This is how sale-leasebacks normally work in business realty, where business typically utilize them to free up capital that's tied up in a realty financial investment.

In genuine estate sale-leasebacks, the financing partner usually creates a triple net lease (which is a lease that requires the occupant to pay residential or commercial property expenditures) for the company that simply sold the residential or commercial property. The financing partner becomes the property manager and gathers lease payments from the former residential or commercial property owner, who is now the occupant.

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

Although realty companies regularly utilize sale-leasebacks, entrepreneur in lots of other industries might not understand about this financing option. However, you can do a sale-leaseback transaction with all sorts of possessions, consisting of business devices like building and construction devices, farm machinery, manufacturing and storage assets, energy options, and more.

Why Would I Want a Sale-Leaseback?

Why would you desire to rent a piece of equipment you already own? The main factor is money flow. When your business requires working capital right away, a sale-leaseback arrangement lets you get both the money you require to operate and the equipment you need to get work done.

So, let's say your company doesn't have a line of credit (LOC), or you require more operating capital than your LOC can provide. Because case, you can use a sale-leaseback to raise capital so you can kick off a brand-new line of product, purchase out a partner, or prepare yourself for the season in a seasonal service, to name a few factors.

How Do Equipment Sale-Leasebacks Work?

There are lots of various methods to structure sale-leaseback deals. If you work with an independent funding partner, they must have the ability to create a solution that's customized to your service and helps you accomplish your short-term and long-lasting goals.

After you offer the equipment to your funding partner, you'll participate in a lease contract and pay for a time period (lease term) that you both concur on. At this time, you end up being the lessee (the celebration that spends for making use of the possession), and your funding partner ends up being the lessor (the celebration that receives payments).

Sale-leasebacks usually include repaired lease payments and tend to have longer terms than many other kinds of funding. Whether the sale-leaseback appears as a loan on your business's balance sheet depends upon whether the transaction was structured as an operating lease (it will not appear) or capital lease (it will).

The major difference in between a line of credit (LOC) and a sale-leaseback is that an LOC is normally protected by short-term possessions, such as accounts receivable and stock, and the rates of interest modifications over time. A business will draw on an LOC as needed to support current money flow needs.

Meanwhile, sale-leasebacks typically 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 month-to-month installments in time.

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

How Much Financing Will I Get?

How much money you get for the sale of the devices depends on the equipment, the financial strength of your organization, and your funding partner. It prevails for a devices sale-leaseback to offer between 50-100 percent of the devices's auction worth in money, however that figure might change based on a wide variety of elements. There's no one-size-fits-all rule we can offer; the finest method to get an idea of just how much capital you'll receive is to contact a funding partner and speak to them about your special circumstance.

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

Frequently, businesses that use sale-leasebacks are business that have high-cost fixed possessions, like residential or commercial property or big and expensive tools. That's why businesses in the genuine estate market love sale-leaseback funding: land is the supreme high-cost set property. However, sale-leasebacks are also used by companies in all sorts of other industries, including building and construction, transport, manufacturing, and farming.

When you're trying to decide whether a piece of devices is a great candidate for a sale-leaseback, think huge. Large trucks, valuable pieces of heavy equipment, and titled rolling stock can all work. However, collections of little items probably will not do, even if they amount to a large amount. For instance, your financing partner most likely won't want to deal with the headache of assessing and possibly offering stacks of used office devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback could look extremely similar to a loan if it's structured as a $1 buyout lease or equipment finance arrangement (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it could look really various from a loan. Since these are extremely various products, attempting to compare them is like comparing apples and oranges. It's not a matter of what product is better - it's about what fits the requirements of your organization.

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

Tax Benefits

With a sale-leaseback, your business may receive Section 179 advantages and reward devaluation, to name a few potential advantages and deductions. Often, your financing partner will have the ability to make your sale-leaseback very 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 devices to the table, your funding partner does not have to handle as much risk. If you own important equipment, then you may be able to receive a sale-leaseback even if your business 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 security (the equipment) in hand, you may have the ability to shape the regards to your sale-leaseback contract. You should be able to work with your funding 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 require to meet two primary conditions to receive a sale-leaseback. Those conditions are:

- You need to own the equipment outright. The equipment must be without liens and must be either entirely paid off or very close.
- The equipment needs to have a resale or auction value. If the equipment does not have any fair market price, then your funding partner won't have a reason 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 on how the transaction was structured to begin. If your sale-leaseback is an operating lease where you quit ownership of the possession, these are the common end of term alternatives:

- Deal with your financing partner to renew the lease.
- Return the equipment to your funding partner, without any additional obligations
- Negotiate a purchase cost 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 commitments.

It's up to you and your financing partner to decide between these options based on what makes one of the most sense for your organization at that time. As an extra alternative, you can have your financing partner structure the sale-leaseback to include an early buyout option. This choice will let you repurchase the equipment at an agreed-upon set price before your lease term ends.

Contact Team Financial Group to Learn About Your Business Financing Options

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

The content supplied here is for informative purposes only. For individualized financial suggestions, please contact our commercial funding experts.