An Equipment Sale and Leaseback allows a company to free up cash by selling equipment it already owns to a commercial financing firm that then leases it back. This arrangement has several benefits, but it’s important for businesses to weigh its pros and cons carefully.
Companies considering this financing method should seek professional advice to understand the impact on their balance sheet and tax implications.
Improved Cash Flow
An equipment sale-leaseback allows you to unlock cash from your existing assets without sacrificing use of those assets. In a sale-leaseback transaction, you sell your equipment to a financing company for fair market value and then lease it back to your business for continued operational use.
Unlike a line of credit, which is revolving and uses short-term assets as collateral, an equipment lease has fixed payments over the term of the lease. This makes it easier to manage cash flow needs, especially during growth spurts or seasonal fluctuations.
At the end of the sale-leaseback, you have several options — including an early buyout option and a $1 purchase price if structured as a capital lease. Talk with your financing company about the options available to you at the end of your lease terms and how these will impact your overall financial landscape. This will help you decide if this financing strategy is the best fit for your business.
Tax Benefits
One of the most popular applications for sale leaseback is monetizing agricultural equipment, such as tractors, harvesters, combines, grain trucks and trailers. This financing strategy allows farmers to improve short-term liquidity while gaining day-to-day access to the asset. It also provides tax benefits that can positively impact balance sheet ratios and reduce risk.
For example, sales leasebacks can transfer depreciated assets to cash without triggering a capital gains liability, as well as offer 100% tax deductibility on lease payments and preservation of debt capacity. Consult with an accountant and financial advisor to understand the tax implications of a sale leaseback before entering into this type of financing agreement.
Contrary to a common myth, leasebacks do not limit future use of equipment or restrict flexibility. Rather, negotiating optimal lease terms and including appropriate end-of-term options allows businesses to unlock working capital to support growth strategies such as expansion, inventory buffers or refinancing existing debt. Ideally, a sale leaseback is a flexible financing arrangement that can meet business operating forecasts and financial needs in the long term.
Flexibility in Financial Planning
Financial flexibility is essential to a company’s success. It enables organizations to meet short-term obligations, leverage resources for growth and profitability and maintain a healthy debt/equity ratio. To achieve financial flexibility, companies should build cash reserves, have a forward-looking model to monitor and track targets, and prioritize projects and expenditures in accordance with larger organizational goals.
An equipment sale/leaseback allows businesses to unlock hidden value in assets they already own and use without creating additional debt on the balance sheet. This arrangement also helps preserve a company’s creditworthiness and financial flexibility, making it easier to secure financing in the future.
A specialized lease finance firm will assess the equipment’s current market value and its expected useful life to determine a fair price. Then, the equipment is sold to the lender and leased back for an agreed-upon term. Companies retain physical possession of the equipment and can continue operating it as usual. The resulting lease payments are often fully deductible and can help maximize tax benefits.
Retained Use of Equipment
An equipment sale and leaseback can be an effective way to free up cash for a company’s operations, but only when the terms of the transaction align with a business’s operational needs and long-term goals. When done properly, it can unlock trapped capital for growth, working capital optimization and new product development.
The key is to work with a financing partner that understands the benefits and pitfalls of sale leasebacks and can create solutions tailored to your business’s unique needs. They should also be able to help you evaluate whether this is the right approach for your company.
A sale-leaseback is a financial transaction where the equipment owner sells the equipment to a lender (typically a commercial financing company) and then immediately leases it back. The company still uses the equipment, but it now has a fixed monthly payment to make to the financing company over a set term. The payments are usually lower than the cost of buying or leasing the equipment, which helps improve cash flow and reduce debt service.