What Is A Sale-Leaseback And Why Would I Want One

What Is a Sale-Leaseback, and Why Would I Want One?
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Once in awhile on this blog, we respond to frequently asked questions about our most popular financing choices so you can get a much better understanding of the many options available to you and the benefits of each.


This month, we're concentrating on the sale-leaseback, which is a financing option numerous companies may have an interest in right now thinking about the current state of the economy.


What Is a Sale-Leaseback?


A sale-leaseback is an unique type of devices financing. In a sale-leaseback, in some cases called a sale-and-leaseback, you can sell a property you own to a renting business or loan provider and after that lease it back from them. This is how sale-leasebacks normally operate in industrial real estate, where companies often utilize them to maximize capital that's bound in a genuine estate financial investment.


In realty sale-leasebacks, the financing partner generally creates a triple net lease (which is a lease that requires the occupant to pay residential or commercial property costs) for the business that simply sold the residential or commercial property. The funding partner ends up being the property owner 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 an equipment sale-leaseback, you can pledge the possession as collateral and borrow the funds through a $1 buyout lease or devices finance arrangement. Depending upon the type of transaction that fits your requirements, the resulting lease might be an operating lease or a capital lease


Although property companies regularly utilize sale-leasebacks, business owners in many other industries might not know about this funding choice. However, you can do a sale-leaseback transaction with all sorts of assets, consisting of business equipment like building and construction equipment, farm equipment, manufacturing and storage properties, energy options, and more.


Why Would I Want a Sale-Leaseback?


Why would you want to lease a tool you currently own? The primary reason is capital. When your company requires working capital right now, a sale-leaseback plan lets you get both the money you require to operate and the devices you require to get work done.


So, let's state your business does not have a line of credit (LOC), or you need more working capital than your LOC can provide. In that case, you can use a sale-leaseback to raise capital so you can begin a new line of product, purchase out a partner, or prepare yourself for the season in a seasonal business, to name a few factors.


How Do Equipment Sale-Leasebacks Work?


There are lots of various methods to structure sale-leaseback offers. If you work with an independent funding partner, they must be able to create a solution that's tailored to your company and assists you attain your short-term and long-term goals.


After you offer the devices to your funding partner, you'll participate in a lease arrangement and make payments for a time duration (lease term) that you both agree on. At this time, you become the lessee (the party that spends for using the possession), and your funding partner becomes the lessor (the party that receives payments).


Sale-leasebacks usually involve fixed lease payments and tend to have longer terms than lots of other types of financing. Whether the sale-leaseback shows up as a loan on your company's balance sheet depends upon 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 protected by short-term properties, such as accounts receivable and stock, and the interest rate modifications with time. A business will make use of an LOC as needed to support current money circulation needs.


Meanwhile, sale-leasebacks usually involve a fixed term and a set rate. So, in a common sale-leaseback, your business would get a swelling sum of cash at the closing and after that pay it back in monthly installations with time.


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


How Much Financing Will I Get?


Just how much money you get for the sale of the devices depends upon the devices, the financial strength of your organization, and your financing partner. It's typical for a devices sale-leaseback to provide between 50-100 percent of the devices's auction worth in cash, however that figure might alter based on a large range of aspects. There's no one-size-fits-all rule we can provide; the very best method to get a concept of how much capital you'll receive is to get in touch with a financing partner and speak to them about your distinct scenario.


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


Usually, organizations that use sale-leasebacks are companies that have high-cost set properties, like residential or commercial property or big and pricey pieces of devices. That's why businesses in the realty industry love sale-leaseback financing: land is the ultimate high-cost set possession. However, sale-leasebacks are likewise utilized by business in all sorts of other markets, including construction, transportation, manufacturing, and farming.


When you're attempting 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 little products most likely will not do, even if they amount to a large amount. For instance, your financing partner most likely will not wish to deal with the headache of evaluating and potentially selling stacks of secondhand office 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 finance agreement (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 different items, trying to compare them is like comparing apples and oranges. It's not a matter of what product is much better - it's about what fits the needs of your business.


With that stated, sale-leaseback transactions do have some distinct advantages.


Tax Benefits


With a sale-leaseback, your business might get approved for Section 179 benefits and reward depreciation, among other possible advantages and deductions. 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 may have the ability to compose 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 equipment to the table, your financing partner does not have to handle as much danger. If you own valuable equipment, then you may have the ability to get approved for a sale-leaseback even if your business has undesirable items on its credit report or is a startup organization with little to no credit rating.


Favorable Terms


Since you're pertaining to the transaction with security (the devices) in hand, you might have the ability to shape the terms of your sale-leaseback arrangement. You should be able to deal with your funding partner to get payment quantities, funding rates, and lease terms that conveniently meet your requirements.


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


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


- You need to own the devices outright. The devices should be devoid of liens and must be either totally settled or very close.
- The devices needs to have a resale or auction worth. If the does not have any reasonable market price, then your financing partner will not have a reason to purchase it from you.


What Happens After the Lease Term?


A sale-leaseback is usually a long-lasting 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 deal 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 options:


- Deal with your financing partner to restore the lease.
- Return the devices to your funding partner, with no further commitments
- Negotiate a purchase cost and purchase the equipment back from your funding partner


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


It depends on you and your funding partner to decide in between these choices based upon what makes the a lot of sense for your organization at that time. As an additional option, you can have your funding partner structure the sale-leaseback to include an early buyout choice. This option will let you bought the equipment at an agreed-upon set cost before your lease term ends.


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


Have concerns about whether you get approved for equipment sale-leaseback financing or any other type of financing? We're here to assist! Call us today at 616-735-2393 or complete our contact form to talk with a financing specialist from Team Financial Group. And if you're prepared to get financing, submit our quick online application and let us do the rest.


The material provided here is for informational purposes just. For customized financial suggestions, please contact our business funding specialists.