What Is a Sale-Leaseback, and Why Would I Want One?
Every now and then on this blog site, we address regularly asked questions about our most popular funding alternatives so you can get a better understanding of the numerous options available to you and the advantages of each.
This month, we're focusing on the sale-leaseback, which is a financing option lots of services might be interested in today thinking about the current state of the economy.
What Is a Sale-Leaseback?
A sale-leaseback is a distinct kind of devices financing. In a sale-leaseback, in some cases called a sale-and-leaseback, you can offer a property you own to a leasing company or lender and after that lease it back from them. This is how sale-leasebacks typically operate in industrial property, where companies typically use them to release up capital that's bound in a real estate investment.
In genuine estate sale-leasebacks, the financing partner normally develops a triple net lease (which is a lease that needs the renter to pay residential or commercial property costs) for the company that just sold the residential or commercial property. The funding partner ends up being the landlord and collects rent payments from the former residential or commercial property owner, who is now the renter.
However, devices sale-leasebacks are more versatile. In an equipment sale-leaseback, you can pledge the possession as collateral and borrow the funds through a $1 buyout lease or devices finance agreement. Depending upon the type of deal that fits your needs, the resulting lease might be an operating lease or a capital lease
Although property business often use sale-leasebacks, company owners in numerous other industries may not know about this funding alternative. However, you can do a sale-leaseback deal with all sorts of properties, consisting of business devices like building devices, farm machinery, manufacturing and storage possessions, energy options, and more.
Why Would I Want a Sale-Leaseback?
Why would you desire to lease a tool you already own? The primary reason is money circulation. When your business needs working capital right away, a sale-leaseback arrangement lets you get both the cash you require to operate and the equipment you require to get work done.
So, let's say your company does not have a credit line (LOC), or you need more operating capital than your LOC can provide. In that case, you can use a sale-leaseback to raise capital so you can start a brand-new product line, buy out a partner, or prepare for the season in a seasonal service, to name a few factors.
How Do Equipment Sale-Leasebacks Work?
There are great deals of different ways to structure sale-leaseback offers. If you work with an independent funding partner, they need to be able to produce an option that's tailored to your company and assists you attain your short-term and long-term objectives.
After you sell the equipment to your financing partner, you'll enter into a lease arrangement and make payments for a time duration (lease term) that you both settle on. At this time, you end up being the lessee (the party that spends for the usage of the asset), and your financing partner ends up being the lessor (the celebration that receives payments).
Sale-leasebacks usually involve fixed lease payments and tend to have longer terms than numerous other types of financing. Whether the sale-leaseback shows up 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 major difference between a credit line (LOC) and a sale-leaseback is that an LOC is usually secured by short-term assets, such as accounts receivable and inventory, and the rates of interest changes over time. An organization will draw on an LOC as needed to support present capital requirements.
Meanwhile, sale-leasebacks generally include a fixed term and a fixed rate. So, in a normal sale-leaseback, your company would receive a lump sum of cash at the closing and then pay it back in month-to-month installations gradually.
RELATED: Business Health: How Equipment Financing Can Help Your Capital
Just How Much Financing Will I Get?
How much cash you get for the sale of the devices depends upon the devices, the financial strength of your service, and your funding partner. It prevails for an equipment sale-leaseback to supply between 50-100 percent of the devices's auction worth in money, however that figure could alter based on a vast array of aspects. There's no one-size-fits-all guideline we can provide; the very best method to get an idea of how much capital you'll get is to get in touch with a financing partner and speak to them about your special scenario.
What Types of Equipment Can I Use to Get a Sale-Leaseback?
Frequently, organizations that utilize sale-leasebacks are business that have high-cost fixed possessions, like residential or commercial property or large and pricey pieces of equipment. That's why services in the realty industry love sale-leaseback financing: land is the supreme high-cost fixed possession. However, sale-leasebacks are likewise used by business in all sorts of other industries, consisting of building and construction, transport, manufacturing, and farming.
When you're trying to choose whether a piece of equipment is a good prospect for a sale-leaseback, think huge. Large trucks, valuable pieces of heavy equipment, and entitled rolling stock can all work. However, collections of little items most likely won't do, even if they include up to a big quantity. For instance, your financing partner more than likely will not wish to deal with the headache of assessing and possibly selling stacks of pre-owned office devices.
Is a Sale-Leaseback Better Than a Loan?
A sale-leaseback might look very similar to a loan if it's structured as a $1 buyout lease or devices financing arrangement (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it might look really various from a loan. Since these are extremely different items, trying to compare them resembles comparing apples and oranges. It's not a matter of what item is much better - it's about what fits the requirements of your service.
With that said, sale-leaseback transactions do have some unique benefits.
Tax Benefits
With a sale-leaseback, your business may certify for Section 179 advantages and bonus offer devaluation, among other potential benefits and reductions. Often, your funding partner will have the ability to make your sale-leaseback really tax-friendly. Depending upon how your sale-leaseback is structured, you might 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 funding partner does not need to handle as much risk. If you own important equipment, then you may be able to receive a sale-leaseback even if your organization has unfavorable products on its credit report or is a startup company with little to no credit history.
Favorable Terms
Since you're concerning the transaction with security (the equipment) in hand, you may have the ability to form the terms of your sale-leaseback arrangement. You need to be able to work with your funding partner to get payment amounts, financing rates, and lease terms that easily fulfill your requirements.
What Are the Restrictions and Requirements for a Sale-Leaseback?
You do need to satisfy two main conditions to receive a sale-leaseback. Those conditions are:
- You require to own the equipment outright. The devices must be without liens and must be either totally paid off or extremely close.
- The equipment needs to have a resale or auction value. If the equipment does not have any reasonable market value, then your funding partner won't have a factor to buy 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 desire to do when the lease ends. At the end of the sale-leaseback term, you'll have a couple of choices, which will depend upon how the deal was structured to start. If your sale-leaseback is an operating lease where you offered up ownership of the asset, these are the common end of term options:
- Work with your funding partner to renew the lease.
- Return the equipment to your financing partner, with no more commitments
- Negotiate a purchase price and purchase the devices back from your financing 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 funding partner to decide in between these choices based upon what makes the most sense for your company at that time. As an additional alternative, 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 fixed price before your lease term ends.
Contact Team Financial Group to Find Out About Your Business Financing Options
Have questions about whether you get approved for devices sale-leaseback funding or any other type of funding? We're here to help! Call us today at 616-735-2393 or complete our contact form to talk with a funding expert from Team Financial Group. And if you're prepared to obtain funding, complete our fast online application and let us do the rest.
The content supplied here is for educational functions just. For customized financial recommendations, please contact our business funding experts.
