What is a sale leaseback? Chances are, you haven’t heard of it. It’s a lesser known – and often misunderstood – financing option.
We want to demystify the sale leaseback. In this post, we’ll look at:
- The definition of sale leaseback
- Advantages & disadvantages of a sale leaseback
- When to use a sale leaseback (and when not to use a sale leaseback)
- How a sale leaseback works
What Is a Sale Leaseback?
The term “sale leaseback” is actually a shortened form of “sale and lease back”. In a sale leaseback transaction, the owner of an asset sells it to someone else, then immediately leases the asset from the person or company that bought it.
A sale leaseback scenario might look like this:
- John buys a truck at an auction.
- He then sells the truck to Lease 1 Financial and gets his money back.
- Lease 1 Financial then leases the truck back to John. He makes monthly payments over the course of the lease term.
- At the end of the lease term, John buys back the truck for a low buy-out amount.
Advantages of a Sale Leaseback
The biggest advantage of a sale leaseback is that it allows the owner or user of an asset to free up cash/capital. As with a regular lease, a sale leaseback gives you the ability to purchase equipment your business needs without using up your cash or line of credit.
Like the above scenario a sale leaseback can also be useful if you are needing to take advantage of an immediate opportunity or if you are importing a piece of equipment and need to pay the vendor upfront. (Please speak to us prior to importing anything to get pre-approved.)
A sale leaseback can improve your balance sheet. By selling the asset, you put cash back into your company and instead have smaller recurring monthly payments over the course of the lease. This can benefit your cash flow and keep your other lines of credit open for inventory and other uses. You get basically all the same advantages as having put the equipment on a lease in the first place.
There can also be tax advantages of a sale leaseback depending on how it is structured. Talk to your accountant for details.
Disadvantages of a Sale Leaseback
The only real disadvantage of a sale leaseback is that you are not the owner of the asset until you buy it out at the end of the lease. So it’s a temporary disadvantage, and a minor one because you still have the benefit of using the asset.
A sale leaseback can be more complex than a regular lease. Depending on the complexity of the situation, it can take a bit more time to finalize the agreement. This is especially true if your bank has a GSA (General Security Agreement) over your company. In that case, the sale leaseback agreement would require a signed waiver from your bank. We are happy to assist you with this process.
When to Use a Sale Leaseback
While there are occasions where it’s good to use a sale leaseback on existing equipment to free up equity that you have, a sale leaseback is not your “get-out-of-jail-free card”. It’s not necessarily a tool to finance working capital when your business is in trouble. That’s a common misconception.
Why can’t you use a sale leaseback to help you if your business isn’t making ends meet? Look at it from the funder’s perspective. If you’re already struggling to generate enough cash to pay your current bills, how can you guarantee you’ll make enough to cover a lease payment? Yes, selling your asset will generate some cash initially, but a funder wants to know that you’ll be able to keep up with payments throughout the lease term.
That said, there are times when a sale leaseback is an excellent and appropriate idea. A funder looks at a sale leaseback on a case-by-case basis. The circumstances around the sale (the type of asset, value of the asset, credit history of your business, your business financial statements, and purpose for the generated money, etc.) will help a funder determine if a sale leaseback is beneficial. We will be happy to chat with you to determine if a sale leaseback is a good option for you.
Some examples of typical good sale leaseback scenarios:
- You just bought a piece of equipment (maybe at an auction) but would rather finance it to keep the cash in your company or to leave more room on your line of credit.
- A “limited time only” or private sale or any sale where time is a major factor. If it’s “now or never”, it might be to your advantage to purchase the asset and secure a sale leaseback.
- Your machine just died and you need to replace it immediately to keep working. If you can’t afford to wait, you can get what you need and deal with the financing later.
- You want to get an additional piece of equipment. You may want to free up the equity in your existing equipment to use toward the cost of the new piece of equipment.
- The equipment you want must be imported from another country. Sometimes this can be a long process. A sale leaseback allows you to buy the equipment to get the shipping process started, then finance it.
- In rare cases, in an emergency loss situation (like a building loss due to fire or being forced to move out), a sale leaseback can be an option to generate cash temporarily only if your business is generating income profitably and consistently.
How a Sale Leaseback Works
It could be risky to buy something in the moment under the assumption that you’ll get a sale leaseback later. Sale leasebacks are only available on approved credit and at the discretion of the funder.
Assuming you qualify for a sale leaseback, here’s how it works:
- You’ve purchased equipment and been approved for a sale leaseback.
- We collect the necessary documentation from you and you sign the lease agreement. (Proof of payment for the equipment will be required, such as a bill of sale and canceled cheque.)
- We/the funder buys the equipment from you, so we/they own it.
- You lease the equipment from the funder for regular monthly payments for the duration of the lease term.
- At the end of the lease term, you make the final buy-out payment and the equipment becomes yours again.
Think of a lease as a “rent-to-own” situation.
Variations of a Typical Sale Leaseback
Sale leasebacks tend to be more complex than regular leases. There are so many factors and parties involved in a sale leaseback. Because of this, the process can take a little longer (typically 3-4 days on a smaller ticket item with good credit). Sometimes it’s better to go with a regular lease because it’s simpler. It just depends on the situation.
If the bank has a General Security Agreement (GSA) over your company, a signed waiver from the bank would be required for the sale leaseback. You must be in good standing with your bank.
If you don’t need all your cash back but still want a sale leaseback, you could make a larger first payment and keep your lease payments down. The funder will still own the entire asset; you won’t have a controlling interest in the equipment. But you will have the advantage of an affordable lease-to-own scenario.
Important Information About Private Sales
If you’re purchasing equipment in a private sale, be sure to pull a lien search on it to be sure it’s free and clear of all liens. Equipment with liens cannot be leased without a signed waiver.
This process varies slightly depending on your province. Here’s the information for lien searches in Alberta. Keep in mind that a person could buy equipment in one province, then move to another province, so be aware of that when doing a lien search.
Is a Sale Leaseback Right for You?
Sale leasebacks are more complex than regular leases, as we’ve already stated. If you’re considering a sale leaseback or want more information about sale leasebacks, we’d be happy to chat with you about it. If you need help deciding if a sale leaseback is right for you, let us help you! That’s what we’re here for. Contact us today.