An equipment sale leaseback is a financing structure that allows you to leverage your existing assets for working capital. The process involves appraising your Equipment Sale and Leaseback, determining its fair market value and creating a financing structure with appropriate terms and payments.

Large equipment like heavy machinery and titled vehicles often work well for this type of transaction. However, a collection of small items might not do the trick.

Benefits

An equipment sale leaseback allows a company to convert assets into cash, improving balance sheets and financial ratios while preserving access to critical capital. Moreover, lease payments typically qualify as operating expenses and can be deductible for tax purposes.

Depending on the specific situation, sale leasebacks can be a powerful tool for raising capital, deploying funds to other operational priorities, and addressing seasonal revenue fluctuations without disrupting business continuity. However, it’s important to evaluate the mechanics, benefits, and risks before engaging in a transaction.

Specialized leasing and financing advisors can help companies structure optimal sale leaseback arrangements. This includes defining the correct lease term aligned to equipment lifecycles, negotiating “bend points” for payment adjustments based on usage, and locking in fair market value repurchase options at the end of the term. This provides financial flexibility and enables strategic investment in growth capital without the cost of debt. Moreover, it may be a valuable way to address equipment obsolescence and replace obsolete or inefficient technology.

Disadvantages

It makes no sense to have company cash tied up in equipment that is no longer required or useful. An innovative financing solution called Equipment Sale and Leaseback (ESLB) enables companies to unlock this trapped capital by selling equipment to a leasing company that then leases it back. This allows companies to free up capital for growth or daily operations while preserving the use of key equipment.

While critics claim that sale leaseback finance seems expensive, they fail to consider the savings on the long term cost of equipment, tax advantages and preserved debt capacity. Additionally, companies with predictable cash flow and a solid forecast of their equipment needs can benefit from negotiated usage parameters that will be compatible with their forecasts for the duration of the lease.

Most equipment that is essential to daily operations can qualify for an ESLB transaction, including vehicles and specialized machinery. However, a company should carefully evaluate whether this type of financing will fit their needs and long-term business plans.

Risks

An often-heard myth warns that only a limited number of assets qualify for sale leaseback. This misperception stems from a tendency to appraise equipment for a sale leaseback based only on its make and model, age and average usage. Select companies like Stride Capital take the whole picture into account, assessing projected usage and the working history of the equipment.

The risk of losing ownership rights is another factor to consider when deciding on an equipment sale leaseback. The lease agreement will likely include various terms and conditions, including maintenance obligations, usage restrictions and penalties for default.

Other risks to consider include the potential for lower overall cost compared to traditional loan financing and an impact on credit ratings. Finally, the lease payments may be structured as operational expenses, potentially offering tax advantages. To mitigate these risks, it’s important to consult with financial and legal professionals before executing any sale leaseback transaction. This will ensure a full understanding of the implications on your business.

Solutions

The simplest way to unlock the value of equipment without sacrificing its use is an Equipment Sale and Leaseback. This innovative financing strategy is a smart option for businesses looking to raise cash quickly, manage debts or stabilize cash flow.

With this arrangement, a company sells equipment assets to an investment or leasing firm, and then immediately leases the asset back. This gives companies access to capital that would otherwise be trapped in the equipment and enables them to maintain operations without interruption.

The lease payments are often structured as off-balance sheet financing, and can be tailored to suit a variety of business needs. In addition, the lease terms can be extended, which offers companies more flexibility as their financial situations change. There are also several end-of-term options available, including the ability to repurchase the equipment or renew the lease. This flexibility provides greater financial flexibility than conventional loans or lines of credit. And since the payments are classified as operating costs, they can also be tax-deductible.