A sell leaseback: what is it? It’s likely that you are unfamiliar with it. It’s a less well-known and frequently misinterpreted kind of funding.
Demystifying the selling leaseback is our goal. This article will examine:
- What selling leaseback means
- Benefits and Drawbacks of a Sale Leaseback
- When a sell leaseback should be used (and when it shouldn’t)
- How a leaseback is executed
A Sale Leaseback: What Is It?
In actuality, “sale and lease back” is reduced to “sale leaseback.” In a sale-leaseback arrangement, the asset’s owner sells it to a third party and then promptly leases the item back from the buyer or buyer’s business.
This is how a sale-leaseback scenario might appear:
- At an auction, John purchases a truck.
- After that, he gets his money back by selling the truck to Lease 1 Financial.
- John is subsequently leased the truck back by Lease 1 Financial. For the duration of the lease, he pays each month.
- John buys back the truck at the end of the lease for a little buy-out sum.
Benefits of a Leaseback Agreement
The ability to release cash or capital for the asset’s owner or user is the main benefit of a sell leaseback. A sell leaseback allows you to buy the equipment your company needs without depleting your cash or credit line, just like a typical lease does.
Similar to the situation mentioned above, a sell leaseback can also be helpful in situations where you need to seize an opportunity right away or when you import equipment and must pay the vendor in full. (To obtain pre-approved, please speak with us before importing anything.)
Your balance sheet may benefit from a sell leaseback. You reinvest the proceeds from the asset’s sale back into your business in the form of decreased monthly lease payments. Maintaining your other credit lines active for purposes such as purchasing merchandise and other needs will help your cash flow. You essentially receive the same benefits as if you had originally leased the equipment.
Depending on how it is set up, a sell leaseback may also have tax benefits. For more information, see your accountant.
A Sale Leaseback’s Drawbacks
The fact that you cannot really own the asset until you buy it out at the end of the lease is the only true drawback of a sell leaseback. Hence, it’s just a brief drawback and a slight one given that you can still utilize the asset.
Compared to a standard lease, a sale leaseback may be more complicated. The completion of the agreement may require additional time, depending on how complicated the circumstances are. This is especially true if your bank has a General Security Agreement (GSA) over your business. The sale leaseback arrangement would then need your bank to sign a waiver. We will be pleased to help you with this procedure.
When to Apply for a Leaseback for Sale
While there are times when using an existing equipment sale leaseback is a useful way to free up equity, this is not your “get-out-of-jail-free card.” It’s not always a useful tool for financing working capital when things go wrong for your company. It’s a widespread misperception.
If your business isn’t profitable, why can’t you use a sales leaseback to help? Consider it from the standpoint of the funder. How can you be sure you’ll have enough money to pay a lease payment if you’re already having trouble making ends meet to pay your existing bills? Sure, selling your asset will bring in some money up front, but a funder needs to be sure you can make the payments throughout the course of the lease.
Nevertheless, there are instances in which a sale leaseback is a wise and suitable decision. A funder considers each sale leaseback situation differently. Funders will use the specifics of the transaction—such as the kind of asset, its valuation, your company’s credit history, its financial statements, and the intended use of the proceeds, among other factors—to assess whether a sell leaseback makes sense. To find out if a sale leaseback is the right choice for you, we would be pleased to speak with you.
Here are a few instances of common good sale leaseback situations:
- You recently purchased some equipment, possibly at an auction, but you would want to finance it so that you can retain the money in your business or expand your credit limit.
- A private sale, one that is “limited time only,” or any transaction in which timing is crucial. It could be advantageous for you to buy the asset and obtain a sell leaseback if it’s “now or never.”
- Your computer recently died, and in order to continue operating, you must replace it right now. You can get what you need and take care of the financing later if you can’t wait.
- You would want to purchase an extra item of gear. To help with the expense of the new equipment, you could choose to release some equity from your current equipment.
- It is necessary to import the desired equipment from another nation. This can occasionally be a drawn-out process. With a sell leaseback, you can finance the purchase of the equipment needed to begin the shipping process after it is made.
- A sell leaseback may occasionally be a viable choice in an emergency loss scenario (such as a building fire or being forced to evacuate), but only if your company is regularly and profitably turning a profit.
The Workings of a Sale Leaseback
Purchasing anything now with the hope of receiving a leaseback later on could be dangerous. Sale leasebacks are subject to funder discretion and are only accessible with authorized financing.
This is how a sale leaseback operates, if you are eligible for one:
- You’ve been granted approval for a leaseback after purchasing equipment.
- After we obtain the required paperwork from you, you sign the lease. (A bill of sale or canceled check, for example, will serve as proof of payment for the equipment.) We or they own the equipment because we or the funder purchased it from you.
- For the length of the lease term, you lease the equipment from the funder in exchange for consistent monthly payments.
- Once the lease expires, you make the last buy-out payment, and the equipment is once again yours.
Consider a lease to be a “rent-to-own” scenario.
Different Takes on a Standard Sale Leaseback
Compared to standard leases, sale leasebacks are often more complicated. A sale leaseback involves an enormous number of variables and stakeholders. Consequently, the procedure may require an extra day or two (usually 3-5 days for a smaller ticket item with good credit). Because it’s simpler, going with a standard lease is sometimes preferable. It simply relies on the circumstances.
Should the bank hold a General Security Agreement (GSA) over your business, the sale leaseback would necessitate a signed waiver from the bank. You have to have a clean record with your bank.
You could make a larger initial payment and reduce your lease payments if you want a sale leaseback but do not need to receive your entire cash back. You won’t hold a controlling interest in the equipment; the funder will still own the entire asset. However, you will benefit from a reasonably priced lease-to-own arrangement.
Crucial Details Regarding Private Sales
Make sure the equipment you’re buying in a private sale is free and clear of liens by doing a lien search on it. It is not possible to lease equipment that has liens without a signed waiver.
Your province may have slight variations in this process. This is the Alberta lien search information. When conducting a lien search, bear in mind that someone may purchase equipment in one province and subsequently relocate to another.
Are You a Good Fit for a Sale Leaseback?
As we’ve already mentioned, sale leasebacks are more complicated than standard leases. We would be pleased to speak with you if you are thinking about a sale or leaseback or would like more information about them. Let us assist you in determining if a sale leaseback is the best option for you if you need it! That’s the reason we’re here. Reach out to us right now.