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

Occasionally on this blog, we respond to regularly asked concerns about our most popular financing options so you can get a much better understanding of the numerous services offered to you and the advantages of each.

This month, we're focusing on the sale-leaseback, which is a funding alternative lots of companies might be interested in right now considering 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, sometimes called a sale-and-leaseback, you can sell an asset you own to a renting company or lending institution and then lease it back from them. This is how sale-leasebacks typically work in industrial property, where companies typically utilize them to maximize capital that's connected up in a real estate financial investment.

In real estate sale-leasebacks, the funding partner typically creates a triple net lease (which is a lease that requires the occupant to pay residential or commercial property costs) for the business that just sold the residential or commercial property. The funding partner ends up being the property owner and collects 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 pledge the asset as security and obtain the funds through a $1 buyout lease or equipment financing contract. Depending on the kind of deal that fits your needs, the resulting lease might be an operating lease or a capital lease

Although realty business frequently utilize sale-leasebacks, entrepreneur in many other industries may not understand about this funding choice. However, you can do a sale-leaseback transaction with all sorts of possessions, including commercial equipment like construction devices, farm machinery, production and storage assets, energy services, and more.

Why Would I Want a Sale-Leaseback?

Why would you want to rent a piece of devices you currently own? The main reason is capital. When your business requires working capital right now, a sale-leaseback plan lets you get both the cash you need to operate and the devices 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. In that case, you can utilize a sale-leaseback to raise capital so you can start a new product line, purchase out a partner, or get all set for the season in a seasonal company, to name a few factors.

How Do Equipment Sale-Leasebacks Work?

There are lots of various methods to structure sale-leaseback offers. If you deal with an independent funding partner, they ought to be able to develop a solution that's customized to your service and helps you achieve your short-term and long-lasting goals.

After you sell the devices to your funding partner, you'll get in into a lease contract and pay for a time period (lease term) that you both settle on. At this time, you end up being the lessee (the celebration that spends for making use of the property), and your financing partner becomes the lessor (the celebration that gets payments).

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

The major difference between a credit line (LOC) and a sale-leaseback is that an LOC is normally secured by short-term properties, such as accounts receivable and stock, and the interest rate modifications gradually. An organization will make use of an LOC as needed to support current money circulation needs.

Meanwhile, sale-leasebacks generally involve a fixed term and a fixed rate. So, in a common sale-leaseback, your company would get a lump amount of money at the closing and then pay it back in monthly installations over time.

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

How Much Financing Will I Get?

Just how much cash you get for the sale of the devices depends on the equipment, the financial strength of your company, and your funding partner. It's common for an equipment sale-leaseback to offer between 50-100 percent of the equipment's auction worth in cash, but that figure could change based on a vast array of elements. 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 get in touch with a funding partner and speak to them about your distinct situation.

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

Usually, services that use sale-leasebacks are companies that have high-cost fixed assets, like residential or commercial property or large and costly tools. That's why organizations in the property market love sale-leaseback funding: land is the supreme high-cost fixed asset. However, sale-leasebacks are likewise utilized by companies in all sorts of other markets, including building and construction, transportation, manufacturing, and farming.

When you're attempting to decide whether a piece of devices is a great prospect for a sale-leaseback, believe big. Large trucks, important pieces of heavy equipment, and entitled rolling stock can all work. However, collections of small products most likely will not do, even if they amount to a big amount. For example, your financing partner most likely won't wish to deal with the headache of examining and possibly selling stacks of pre-owned office devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback could look really similar to a loan if it's structured as a $1 buyout lease or devices financing agreement (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 resembles comparing apples and oranges. It's not a matter of what product is better - it has to do with what fits the needs of your service.

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

Tax Benefits

With a sale-leaseback, your business might qualify for Section 179 advantages and perk depreciation, among other possible benefits and reductions. Often, your financing partner will be able to make your sale-leaseback really 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 financing partner does not need to handle as much danger. If you own important devices, then you may be able to certify for a sale-leaseback even if your company has unfavorable items on its credit report or is a start-up business with little to no credit report.

Favorable Terms

Since you're coming to the deal with collateral (the devices) in hand, you may have the ability to shape the terms of your sale-leaseback agreement. You should be able to work with your financing partner to get payment amounts, financing rates, and lease terms that comfortably fulfill your needs.

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

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

- You need to own the devices outright. The devices should be without liens and need to be either totally settled or extremely close.

• The devices needs to have a resale or auction value. If the equipment does not have any fair market price, then your funding partner will not have a factor to purchase it from you.
  
  What Happens After the Lease Term?
  
  A sale-leaseback is generally a long-lasting 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 options, 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 asset, these are the normal end of term choices:
  
  - Work with your financing partner to restore the lease.
• Return the devices to your funding partner, without any additional responsibilities
• Negotiate a purchase rate and buy the equipment back from your funding partner
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  If your sale-leaseback was structured as a capital lease, you may own the devices free and clear at the end of the lease term, with no more responsibilities.
  
  It depends on you and your funding partner to decide between these choices based upon what makes one of the most sense for your service at that time. As an extra choice, you can have your financing partner structure the sale-leaseback to consist of an early buyout choice. This option will let you redeemed the equipment at an agreed-upon set price before your lease term ends.
  
  Contact Team Financial Group to Find Out About Your Business Financing Options
  
  Have questions about whether you receive equipment sale-leaseback funding or any other type of funding? We're here to assist! Call us today at 616-735-2393 or submit our contact kind to talk with a financing specialist from Team Financial Group. And if you're all set to apply for funding, fill out our application and let us do the rest.
  
  The material supplied here is for informational functions only. For individualized monetary advice, please contact our industrial funding specialists.