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

What Is a Sale-Leaseback: We periodically respond to frequently asked questions regarding our most well-liked financing choices on this blog. To help you better understand the range of options accessible to you and their respective advantages.

This month, we’re concentrating on the sale-leaseback, a financing option that, given the status of the economy. Many firms might find appealing at the moment.

A Sale-Leaseback: What Is It?

A special kind of financing for equipment is a sale-leaseback. A sale-leaseback, also known as a sale-and-leaseback, allows you to sell an asset you own to a lender or leasing business, who would subsequently lease it back to you. Businesses frequently use sale-leasebacks in commercial real estate to release capital from a real estate investment.

The financing partner in a real estate sale-leaseback typically drafts a triple net lease for the business that recently sold the property, which is a lease that requires the tenant to pay property expenditures. The finance partner takes on the role of landlord, collecting rent from the now-tenant former property owner.

On the other hand, equipment leasebacks are more adaptable. You can use an equipment finance arrangement or a $1 buyout lease to borrow money in an equipment sale-leaseback by pledging the asset as security. The resulting lease may be an operational lease or a capital lease, depending on the kind of transaction that best suits your needs.

While real estate companies frequently use sale-leasebacks as a financing option, business owners in many other industries might not be aware of this possibility. On the other hand, a variety of assets can be used in a sale-leaseback arrangement, such as energy solutions, manufacturing and storage assets, farm machinery, and commercial equipment like construction equipment.

What Makes a Sale-Leaseback Desirable to Me?

For what reason would you wish to rent a piece of gear that you already own? The cash flow is the primary cause. In situations where your business requires working capital immediately, a sale-leaseback agreement enables you to obtain the funds required for operations as well as the tools required to complete tasks.

Let’s imagine that either your business lacks a line of credit (LOC) or that you require more working capital than your LOC can offer. In that scenario, among other things, you can utilize a sale-leaseback to earn money to launch a new product line, acquire a partner, or prepare for the season in a seasonal business.

How do leasebacks of equipment operate?

Sale-leaseback agreements can be set up in a variety of ways. When you collaborate with an independent finance partner, they ought to be able to design a plan that fits your company’s needs and advances both your immediate and long-term objectives.

You will sign a lease agreement and begin making payments for the agreed-upon lease term when you sell the equipment to your finance partner. At this point, your financial partner becomes the lessor (the entity that gets payments), and you become the lessee (the one who pays for the use of the asset).

Compared to many other forms of financing, sale-leasebacks often have longer durations and set lease payments. Depending on how the deal was set up, the sale-leaseback will either appear as a capital lease (it will) or an operational lease (it won’t) on your company’s balance sheet.

The main distinction between a sale-leaseback and a line of credit (LOC) is that the latter is subject to variable interest rates while the former typically has short-term assets like inventory and accounts receivable as security. When necessary, a company will use its LOC to meet its short-term cash flow requirements.

Sale-leaseback agreements, on the other hand, often have a set period and fixed rate. Thus, in a standard sale-leaseback, your business would get a big payment at closing and repay it gradually over time with monthly installments.

Related: The Benefits of Equipment Financing for Your Company’s Cash Flow

How Much Loan Will I Receive?

Your financial partner, your company’s financial stability. And the equipment itself will all affect how much money you get when you sell the equipment. Although it is typical for an equipment sale-leaseback to provide 50–100% of the equipment’s auction value in cash, there are many variables that could affect that percentage. We are unable to offer a single rule that works for every instance; therefore, the best method to determine the amount of funds you will receive is to speak with a financing partner about your particular circumstances.

Which Equipment Kinds Are Acceptable for a Sale-Leaseback?

Businesses that use sale-leasebacks typically have high-cost fixed assets, such as real estate or pricey pieces of equipment. Land is the ultimate high-cost fixed asset, which is why companies in the real estate sector adore sale-leaseback finance. However, businesses in a wide range of other sectors, including manufacturing, transportation, agriculture, and construction, also employ sale-leasebacks.

Consider the big picture when determining whether a piece of equipment is a suitable fit for a sale-leaseback. Big vehicles, expensive heavy equipment, and titled rolling stock can all function. Even when they total a lot, collections of little things definitely won’t work. For instance, it’s unlikely that your finance partner will want to take on the burden of evaluating and maybe selling large quantities of used office equipment.

Is a loan not as good as a sale-leaseback?

If you set up a sale-leaseback as an equipment finance agreement (EFA) or a $1 buyout lease. It may resemble a loan in many ways. Additionally, your sale-leaseback may not resemble a loan at all if it is set up as a combination of an operational lease and a sale. Comparing these products would be like comparing apples and oranges because they are so dissimilar from one another. What works for your business is more important than whether the product is superior.

Nevertheless, there are a few clear advantages to sale-leaseback agreements.

Tax Advantages

In addition to other possible benefits and deductions, your business may be eligible for Section 179 benefits and bonus depreciation via a sale-leaseback. Your financing partner can often make your sale-leaseback arrangement extremely tax-efficient. The form of your sale-leaseback may allow you to deduct all of the payments from your taxes.

Related: Finance Commercial Equipment to Avail These Tax Advantages

Reduce the bar to be eligible.

Your financing partner bears less of the risk because you are bringing the equipment to the table. Even if your company is a startup with little to no credit history or has negative marks on its credit report, you might be eligible for a sale-leaseback, provided you own quality equipment.

Advantageous Conditions

You might be able to influence the conditions of your sale-leaseback agreement. Because you are entering into the deal with the equipment as collateral. Together with your financing partner. You need to be able to negotiate leasing terms, financing rates, and payment schedules that suit your budget and requirements.

What limitations and conditions apply to a sale-leaseback?

In order to be eligible for a sale-leaseback, you do need to fulfill two main requirements. These prerequisites are:

  • All of the equipment must be yours. Liens must not be present on the equipment, and it should be fully or almost fully paid for.
  • The equipment must be valuable at auction or for resale. If the equipment holds no reasonable market value, your financing partner won’t feel motivated to buy it from you.

After the lease term, what takes place?

Typically, a sale-leaseback is a long-term lease, giving you plenty of time to plan your next move after it expires. Depending on how the transaction was set up initially. You will have a few alternatives after the end of the sale-leaseback period. These are the usual end-of-term alternatives if your sale-leaseback is an operating lease where you forfeit ownership of the asset:

  • Renew the lease by working with your financial partner.
  • With no further duties, return the equipment to your finance partner.
  • Purchase the equipment back from your lending partner after settling on a purchase price.

At the conclusion of the lease term, you can become the free and clear owner of the equipment. With no further responsibilities. If your sale-leaseback was set up as a capital lease.

You and your financing partner will have to choose. Which of these solutions makes the most sense for your company at that particular moment. You can also ask your financing partner to incorporate an early buyout option in the sale-leaseback arrangement. If you choose this option, you can return the equipment before the end of your lease period at a predetermined, agreed-upon amount.

To discover your business financing options, get in touch with Commercial Lending USA.

Do you have any inquiries regarding your eligibility for any other form of financing, such as equipment sale-leaseback finance? We are available to assist you! Give us a call at (855) 365-9200 or use our online form to speak with a Commercial Lending USA finance specialist right now. And when you’re prepared to submit a financing application. Simply complete our short online form and give us the rest of the work.

This content is intended solely for informational purposes. Please get in touch with our commercial lending specialists for individualized financial guidance.

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