Equipment Sale And Lease Back

Equipment Sale And Leaseback For New And Used Equipment

Equipment sale and leaseback is essentially a financing transaction between a business owner and a leasing company whereby the equipment leasing company purchases assets that the business own outright and provides financing in the form of sale proceeds to the business owner or lessee along with a lease term that will have buyback options outlined at the end of the lease term.Equipment sale and leaseback transactions occur regularly on both new and used equipment as well as equipment acquisitions versus equipment refinancing transactions.Let’s explore each of these.For an asset purchase that has taken place within the last 6 months, for either new or used equipment, a sale and lease back transaction can be arranged to sell the asset acquired to a leasing company.

This is most commonly done in situations where the business owner acquires an asset for cash and then wants to finance it after the fact so that less cash is tied up in the asset.

As an example, there can be situations where the best deal is a cash purchase and the time frame for completion is very short.  So the business owner utilizes cash or operating credit to acquire the asset quickly in order to not miss out on the buying opportunity.  Then, once the asset is secured, long term financing is arranged.

While this may seem a bit backwards with the financing being arranged after the purchase, it is actually a fairly common transaction.

But the key to making it work is to start working on the lease financing options right away as most leasing companies will only consider this type of transaction up to 6 months after the time of purchase.

When you work within the 6 month period, you also are going to get the benefit of the better rates and leverage available as leasing companies essentially treat these transactions like a to be completed purchase.

The other type of equipment sale and leaseback transaction, which has become more popular in the last few years, is the selling of assets owned longer than 6 months for the purpose of generating incremental capital for the business.

In most of these cases, the assets being offered to  a leasing company were already financed once and paid off or nearly paid off, resulting in equity being available to leverage again.

This type of used equipment financing or refinancing is viewed more conservatively by equipment leasing companies compared to a new acquisition or one completed in the last 6 months.

This is due to the fact that its harder for a leasing company to put a true value on equipment that has been owned and operated by a business for a substantial period of time without incurring a considerable amount of cost.

While third party appraisals are relied on, the leasing companies will also take the most conservative view of here and only consider up to 75% of forced liquidation value as a potential financing amount.

Regardless of the lower level of leverage available, equipment sale and leaseback transactions on owned equipment can be an important source of business financing for both working capital and fixed capital investment.

If you are interested in a sale and leaseback financing for a recently completed purchase or an equipment refinancing requirement, I suggest that you give us a call so we can quickly assess your situation and provide equipment sale and lease back options for your consideration.

 

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