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

Every now and then on this blog site, we respond to frequently asked questions about our most popular financing alternatives so you can get a better understanding of the numerous solutions readily available to you and the advantages of each.

This month, we're concentrating on the sale-leaseback, which is a financing alternative many companies might be interested in today considering the existing state of the economy.

What Is a Sale-Leaseback?

A sale-leaseback is a distinct kind of devices financing. In a sale-leaseback, often called a sale-and-leaseback, you can sell a possession you own to a leasing company or lending institution and then lease it back from them. This is how sale-leasebacks generally operate in commercial property, where companies frequently use them to maximize capital that's bound in a real estate financial investment.

In genuine estate sale-leasebacks, the funding partner typically produces a triple net lease (which is a lease that requires the tenant to pay residential or commercial property expenditures) for the business that just sold the residential or commercial property. The funding partner becomes the property manager and collects lease payments from the previous residential or commercial property owner, who is now the occupant.

However, devices sale-leasebacks are more flexible. In a devices sale-leaseback, you can pledge the possession as collateral and borrow the funds through a $1 buyout lease or equipment finance arrangement. Depending on the kind of transaction that fits your needs, the resulting lease might be an operating lease or a capital lease

Although genuine estate business often use sale-leasebacks, entrepreneur in lots of other markets might not know about this funding option. However, you can do a sale-leaseback transaction with all sorts of properties, including business equipment like building and construction equipment, farm machinery, production and storage properties, energy solutions, and more.

Why Would I Want a Sale-Leaseback?

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

So, let's say your business doesn't have a credit line (LOC), or you require more working capital than your LOC can offer. Because case, you can utilize a sale-leaseback to raise capital so you can kick off a brand-new line of product, purchase out a partner, or prepare for the season in a seasonal business, to name a few reasons.

How Do Equipment Sale-Leasebacks Work?

There are lots of various ways to structure sale-leaseback deals. If you work with an independent funding partner, they should have the ability to create a service that's customized to your company and assists you accomplish your short-term and long-term goals.

After you sell the equipment to your financing partner, you'll get in into a lease agreement 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 making use of the possession), and your financing partner becomes the lessor (the celebration that receives payments).

Sale-leasebacks usually include fixed lease payments and tend to have longer terms than lots of other kinds of financing. Whether the sale-leaseback appears as a loan on your company's balance sheet depends on whether the transaction was structured as an operating lease (it won't reveal up) or capital lease (it will).

The significant distinction between a line of credit (LOC) and a sale-leaseback is that an LOC is usually protected by short-term possessions, such as and stock, and the rate of interest changes gradually. A business will make use of an LOC as required to support existing capital needs.

Meanwhile, sale-leasebacks generally involve a fixed term and a set rate. So, in a normal sale-leaseback, your company would get a lump amount of money at the closing and after that pay it back in month-to-month installations in time.

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

Just How Much Financing Will I Get?

Just how much money you receive for the sale of the equipment depends upon the devices, the financial strength of your service, and your financing partner. It's typical for an equipment sale-leaseback to provide in between 50-100 percent of the equipment's auction worth in money, but that figure could alter based upon a large range of factors. There's no one-size-fits-all rule we can offer