Equipment Sale Leaseback
A sale-leaseback works kind of like a home equity loan on your house. If you OWN the equipment (especially heavy equipment identifiable with a title and VIN) you can use that asset to receive cash and pay it back over a period of time.
What is a Sale-Leaseback?
A sale-leaseback is a unique type of equipment financing. In a sale-leaseback, sometimes called a sale-and-leaseback, you can sell an asset you own to a leasing company or lender and then lease it back from them. In an equipment sale-leaseback, you pledge the asset as collateral and borrow the funds through a $1 buyout lease or equipment finance agreement. Depending on the type of transaction that fits your needs, the resulting lease could be an operating lease or a capital lease.
Why Would I Want a Sale-Leaseback?
Why would you want to lease a piece of equipment you already own? The main reason is cash flow. When your company needs working capital right away, a sale-leaseback arrangement lets you get both the cash you need to operate and the equipment you need to get work done.
Advantages of a Sale-Leaseback
- Lower bar to qualify, even for bad credit or start-up businesses as long as the equipment is a fit.
- A sale-leaseback can be very tax friendly – with payments often structured as operating costs.
- The terms, rate, and payment on a sale-leaseback are often more favorable than other methods of getting access to funds.
Disadvantages of a Sale-Leaseback
- If you default on the loan, your equipment will be repossessed.
- A sale-leaseback typically works on a 2-1 ratio. If you need $100,000 you will need to pledge equipment valued at $200,000.
- Equipment is valued at “liquidation value” – which is what a lender would get at auction. This is often much lower than what is anticipated.
Will your Equipment Qualify for a Sale-Leaseback?
- Is the equipment free of liens and owned outright?
- Is the asset identifiable only to you with a serial # or VIN#?
- Can the equipment be repossessed and liquidated in case of default?
- In case of default, is the value of the equipment worth the cost of repossession and remarketing for resale?