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

Every so often on this blog, we address frequently asked questions about our most popular funding choices so you can get a much better understanding of the lots of services available to you and the benefits of each.

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

What Is a Sale-Leaseback?

A sale-leaseback is a distinct kind of devices funding. In a sale-leaseback, sometimes called a sale-and-leaseback, you can sell a property you own to a leasing business or loan provider and then rent it back from them. This is how sale-leasebacks normally work in industrial real estate, where business often use them to release up capital that's connected up in a realty investment.

In realty sale-leasebacks, the financing partner normally develops a triple net lease (which is a lease that needs the tenant to pay residential or commercial property costs) for the company that simply sold the residential or commercial property. The funding partner becomes the proprietor and gathers rent payments from the previous residential or commercial property owner, who is now the renter.

However, equipment sale-leasebacks are more flexible. In a devices sale-leaseback, you can promise the property as security and obtain the funds through a $1 buyout lease or equipment finance agreement. Depending on the kind of transaction that fits your needs, the resulting lease could be an operating lease or a capital lease

Although real estate companies frequently use sale-leasebacks, company owner in many other markets might not know about this funding alternative. However, you can do a sale-leaseback transaction with all sorts of assets, including business devices like building equipment, farm machinery, production and storage possessions, energy solutions, and more.

Why Would I Want a Sale-Leaseback?

Why would you wish to lease a tool you currently own? The main reason is money circulation. When your company needs working capital immediately, a sale-leaseback arrangement lets you get both the money you require to run and the equipment you require to get work done.

So, let's state your company does not have a line of credit (LOC), or you require more operating capital than your LOC can supply. In that case, you can use a sale-leaseback to raise capital so you can start a brand-new item line, buy out a partner, or get ready for the season in a seasonal organization, to name a few factors.

How Do Equipment Sale-Leasebacks Work?

There are lots of different ways to structure sale-leaseback deals. If you deal with an independent funding partner, they must have the ability to create an option that's customized to your service and assists you achieve your short-term and long-term objectives.

After you offer the equipment to your funding partner, you'll get in into a lease contract and pay for a time duration (lease term) that you both agree on. At this time, you end up being the lessee (the celebration that pays for making use of the property), and your financing partner becomes the lessor (the party that gets payments).

Sale-leasebacks typically involve fixed lease payments and tend to have longer terms than many other types of funding. Whether the sale-leaseback shows up as a loan on your company's balance sheet depends on whether the deal 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 generally secured by short-term possessions, such as balance dues and inventory, and the rate of interest changes gradually. A business will draw on an LOC as required to support current capital needs.

Meanwhile, sale-leasebacks typically include a set term and a set rate. So, in a normal sale-leaseback, your company would get a swelling sum of money at the closing and then pay it back in regular monthly installments gradually.

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

Just How Much Financing Will I Get?

Just how much cash you receive for the sale of the equipment depends upon the equipment, the monetary strength of your organization, and your financing partner. It prevails for a devices sale-leaseback to offer between 50-100 percent of the equipment's auction worth in cash, however that figure might change based on a wide variety of aspects. There's no one-size-fits-all guideline we can offer; the finest method to get a concept of how much capital you'll get is to call a financing partner and speak to them about your unique scenario.

What Kinds Of Equipment Can I Use to Get a Sale-Leaseback?

Frequently, services that utilize sale-leasebacks are business that have high-cost fixed properties, like residential or commercial property or big and pricey tools. That's why businesses in the property industry love sale-leaseback financing: land is the ultimate high-cost fixed asset. However, sale-leasebacks are likewise used by companies in all sorts of other markets, consisting of building and construction, transport, production, and farming.

When you're trying to decide whether a piece of devices is an excellent candidate for a sale-leaseback, think huge. Large trucks, valuable pieces of heavy machinery, and entitled rolling stock can all work. However, collections of little products most likely will not do, even if they amount to a large amount. For example, your financing partner probably will not wish to deal with the headache of assessing and possibly offering stacks of used workplace equipment.

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 devices finance arrangement (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 really different products, trying 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 needs of your business.

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

Tax Benefits

With a sale-leaseback, your company might certify for Section 179 benefits and reward devaluation, amongst other potential benefits 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 may be able 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 financing partner doesn't need to handle as much threat. If you own valuable devices, then you might be able to receive a sale-leaseback even if your business has undesirable products on its credit report or is a start-up organization with little to no credit history.

Favorable Terms

Since you're concerning the transaction with security (the devices) in hand, you may be able to shape the terms of your sale-leaseback contract. You need to be able to work with your financing partner to get payment amounts, financing rates, and lease terms that comfortably satisfy your requirements.

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

You do require to satisfy 2 main conditions to get approved for a sale-leaseback. Those conditions are:

- You require to own the devices outright. The equipment should be devoid of liens and must be either totally settled or really close.
- The devices requires to have a resale or auction value. If the devices does not have any reasonable market worth, then your financing partner won't have a factor to acquire it from you.

What Happens After the Lease Term?

A sale-leaseback is normally a long-lasting lease, so you'll have time to decide 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 deal was structured to begin. If your sale-leaseback is an operating lease where you gave up ownership of the possession, these are the typical end of term options:

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

If your sale-leaseback was structured as a capital lease, you might own the equipment totally free and clear at the end of the lease term, with no further commitments.

It's up to you and your financing partner to decide in between these choices based upon what makes one of the most sense for your service at that time. As an extra alternative, you can have your funding partner structure the sale-leaseback to consist of an early buyout alternative. This choice will let you bought the equipment at an agreed-upon set price 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 financing? We're here to help! Call us today at 616-735-2393 or fill out our contact type to talk with a financing professional from Team Financial Group. And if you're all set to request funding, submit our quick online application and let us do the rest.

The material provided here is for educational functions only. For individualized financial suggestions, please contact our commercial funding experts.