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What is a Sale-Leaseback, and why would i Want One?

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

Every now and then on this blog, we respond to often asked questions about our most popular funding choices so you can get a much better understanding of the numerous options offered to you and the benefits of each.

This month, we’re focusing on the sale-leaseback, which is a financing alternative numerous organizations might be interested in today considering the existing state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is an unique type of equipment 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 loan provider and after that rent it back from them. This is how sale-leasebacks generally operate in business genuine estate, where companies frequently use them to free up capital that’s connected up in a property financial investment.

In realty sale-leasebacks, the funding partner typically a triple net lease (which is a lease that requires the renter to pay residential or commercial property expenses) for the company that just offered the residential or commercial property. The funding partner ends up being the property manager and gathers rent payments from the former residential or commercial property owner, who is now the occupant.

However, equipment sale-leasebacks are more flexible. In an equipment sale-leaseback, you can pledge the property as collateral and borrow the funds through a $1 buyout lease or equipment financing contract. Depending on the kind of deal that fits your needs, the resulting lease could be an operating lease or a capital lease

Although property companies regularly utilize sale-leasebacks, entrepreneur in many other markets might not know about this financing choice. However, you can do a sale-leaseback transaction with all sorts of assets, consisting of commercial devices like building devices, farm machinery, manufacturing and storage possessions, energy options, and more.

Why Would I Want a Sale-Leaseback?

Why would you wish to rent a tool you currently own? The main factor is capital. When your business requires working capital right away, a sale-leaseback arrangement lets you get both the money you need to operate and the equipment you require to get work done.

So, let’s state your business doesn’t have a credit line (LOC), or you require more operating capital than your LOC can supply. Because case, you can use a sale-leaseback to raise capital so you can begin a brand-new line of product, buy out a partner, or get all set for the season in a seasonal service, to name a few factors.

How Do Equipment Sale-Leasebacks Work?

There are lots of various ways to structure sale-leaseback deals. If you work with an independent financing partner, they must have the ability to produce an option that’s customized to your business and assists you accomplish your short-term and long-lasting goals.

After you offer the devices to your financing partner, you’ll participate in a lease contract and make payments 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 using the property), and your funding partner ends up being the lessor (the party that receives payments).

Sale-leasebacks typically include repaired lease payments and tend to have longer terms than numerous other types of funding. Whether the sale-leaseback appears as a loan on your business’s balance sheet depends on whether the transaction was structured as an operating lease (it won’t appear) or capital lease (it will).

The significant distinction between a credit line (LOC) and a sale-leaseback is that an LOC is generally secured by short-term assets, such as balance dues and inventory, and the rate of interest modifications in time. A business will make use of an LOC as needed to support present money flow requirements.

Meanwhile, sale-leasebacks typically include a set term and a fixed rate. So, in a common sale-leaseback, your business would get a swelling amount of cash at the closing and then pay it back in regular monthly installments in time.

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

How Much Financing Will I Get?

How much cash you get for the sale of the equipment depends upon the devices, the financial strength of your service, and your funding partner. It’s common for a devices sale-leaseback to offer in between 50-100 percent of the equipment’s auction worth in cash, but that figure might change based upon a large range of elements. There’s no one-size-fits-all guideline we can provide; the best way to get a concept of just how much capital you’ll receive is to call a funding partner and talk with them about your unique scenario.

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

Usually, organizations that use sale-leasebacks are business that have high-cost set possessions, like residential or commercial property or large and pricey pieces of equipment. That’s why businesses in the property industry love sale-leaseback funding: land is the ultimate high-cost set property. However, sale-leasebacks are likewise utilized by business in all sorts of other industries, consisting of building, transportation, production, and agriculture.

When you’re trying to decide whether a tool is a great prospect for a sale-leaseback, think huge. Large trucks, valuable pieces of heavy machinery, and entitled rolling stock can all work. However, collections of small items probably will not do, even if they add up to a large quantity. For instance, your financing partner most likely won’t want to deal with the headache of evaluating and potentially selling stacks of pre-owned workplace devices.

Is a Sale-Leaseback Better Than a Loan?

A sale-leaseback could look really comparable to a loan if it’s structured as a $1 buyout lease or devices financing contract (EFA). Or, if your sale-leaseback is structured as a sale and an operating lease, it could look really various from a loan. Since these are very different products, attempting to compare them is like 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 company.

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

Tax Benefits

With a sale-leaseback, your company may certify for Section 179 advantages and bonus depreciation, amongst other prospective benefits and deductions. Often, your financing partner will have the ability to make your sale-leaseback extremely tax-friendly. Depending upon how your sale-leaseback is structured, you might have the ability 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 equipment to the table, your funding partner does not need to take on as much risk. If you own valuable devices, then you might be able to get approved for a sale-leaseback even if your company has undesirable items on its credit report or is a start-up service with little to no credit rating.

Favorable Terms

Since you’re concerning the transaction with collateral (the devices) in hand, you might be able to form the regards to your sale-leaseback arrangement. You should have the ability to deal with your financing partner to get payment amounts, funding rates, and lease terms that conveniently fulfill your needs.

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

You do require to meet 2 primary conditions to certify for a sale-leaseback. Those conditions are:

— You require to own the equipment outright. The equipment should be free of liens and need to be either completely settled or really close.
— The equipment requires to have a resale or auction worth. If the devices does not have any fair market worth, then your financing partner will not have a reason to buy it from you.

What Happens After the Lease Term?

A sale-leaseback is generally a long-term 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 choices, which will depend on 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 normal end of term options:

— Work with your funding partner to renew the lease.
— Return the devices to your financing partner, with no additional obligations
— Negotiate a purchase cost and buy the devices back from your funding partner

If your sale-leaseback was structured as a capital lease, you may own the equipment totally free and clear at the end of the lease term, without any further obligations.

It’s up to you and your funding partner to choose between these alternatives based on what makes the most sense for your organization at that time. As an extra choice, you can have your financing partner structure the sale-leaseback to consist of an early buyout alternative. This option will let you bought the devices at an agreed-upon set price before your lease term ends.

Contact Team Financial Group to Discover Your Business Financing Options

Have concerns about whether you qualify for devices sale-leaseback funding or any other type of funding? We’re here to help! Call us today at 616-735-2393 or fill out our contact form to talk with a financing professional from Team Financial Group. And if you’re prepared to look for funding, complete our fast online application and let us do the rest.

The material offered here is for educational functions only. For customized monetary advice, please contact our commercial financing professionals.