When you’re planning your next business move, pivoting direction is easier when you have the right financing to support your decisions.
Having access to cash allows your company to be agile when opportunities or unexpected expenses arise. A lesser-known product to traditional equipment financing is a sale-leaseback. Many equipment lenders consider this “the key to unlocking the equity in your equipment” because it leverages the value in your equipment to free up cash.
Let’s start with equity: In simple terms, equity is the market value of your asset minus any debt related to the asset. With a sale-leaseback, you can use that equity to get cash. You may be wondering, “How is the value of my equipment determined?” Typically, asset values are derived from a combination of asset condition, asset appraisal, and/or asset comparable analysis.
What is a Sale-leaseback?
A sale-leaseback is a type of transaction that allows you to convert the equity in your equipment into cash. A sale-leaseback is particularly effective because the business is able to retain possession and use the asset throughout the entire transaction. That way, your asset can continue producing revenue while also helping to boost cash flow.
How does a sale-leaseback work?
Once a business identifies a cash need and an asset with sufficient equity, here is how they can go about obtaining a sale-leaseback:
- Application: Beacon’s Business Credit Application is a simple, one-page document that can be completed online from any mobile device. The application allows the business to communicate equipment financing needs and expectations.
- Approval: Upon receipt of your application, our expert equipment financing consultants will contact you to understand your needs and seek the best possible equipment financing approval. You will be provided an approval letter that, among other things, will indicate how much in proceeds you can expect from you equipment. Depending on the circumstances, a sale-leaseback transaction may yield from 60-90% of the equipment’s original value.
- Funding: Upon funding, Beacon provides your business the cash proceeds and takes a lien on the sale-leaseback asset(s).
- Repayment: Then, you will proceed to pay back the lender via a schedule of monthly payments, typically lasting from 24-48 months. Once payments are made in full, ownership of the asset is transferred back to the business.
Pretty straightforward, right? So, why even use a sale-leaseback?
Top 4 Benefits Of A Sale-leaseback
1. Boost your cash flow
One of the advantages of a sale-leaseback is it enables you to get cash from equipment you already own. When done strategically, you can use the cash flow to grow your business and increase your revenue potential. Some effective ways you can use sale-leaseback proceeds to amplify your business include:
- Offering a new service
- Hiring more team members
- Expanding to a new location
- Support your business’ working capital
In addition to extending your business’s potential with the increased cash flow, a sale-leaseback is also a great way to pay for expenses such as equipment repairs.
Here’s an example: Let’s imagine one of your tow trucks recently broke down and needs a new engine. Let’s say the cost to replace/repair your truck’s engine is $7,500… but you don’t have the cash to pay the bill. You know that every day your truck sits in the shop is another day’s lost revenue for your business. The longer your truck is off the road, the more it’s costing your business.
With a sale-leaseback, you can use the equity in your equipment to pay for the repairs. By using sale-leaseback, you’ll be able to pay back the $7,500 engine repair costs over the next 24-36 months, making it easier to manage.
2. Keep possession of your equipment to generate profits
One of the unique perks of a sale-leaseback is it allows you to continue using your leased asset.
Even though you transferred the title or added a lien holder to the current equipment, you still maintain possession of your equipment – keeping it working in your business to build revenue.
3. Fixed repayment structure
The repayment structure for a sale-leaseback operates very much like a traditional financing agreement. Repayment of a sale-leaseback will be in the form of a fixed monthly payment typically over a 24-36 month term. Unlike credit cards, this structured repayment program helps reduce financing costs.
4. Greater ROI
Because the contract is secured by a piece of equipment, a sale-leaseback is often less expensive than other unsecured forms of financing including credit cards.
Common Questions about Sale-leaseback
Why would you do a sale-leaseback?
When your business needs cash, a sale-leaseback is a quick, convenient, and cost effective option.
Sometimes smaller businesses don’t have access to lines of credit from a mainstream bank. A sale-leaseback is a cost effective alternative because, as a secured loan, the lenders risk is less. Unsecured working capital options, such as business credit cards, have more risk to the lender and are typically more expensive.
What are the requirements for a sale-leaseback?
Sale-leaseback transactions are not a viable option if a business does not have sufficient equipment equity to meet their cash flow needs. Assets substantially encumbered by other lenders do not make viable sale-leaseback candidates.
How much cash will I receive from my sale-leaseback?
Here are some general leaseback guidelines when working with a sale-leaseback:
- Equipment Purchased Less Than 90 Days Ago:
- You may be able to get cash proceeds equal to 80-100% of the purchase price.
- Equipment Purchased More Than 90 Days Ago:
- You may be able to get cash proceeds equal to 60-80% of the estimated market value.
What happens after the lease term?
Upon repayment of the sale-leaseback, the lender will release their lien and/or transfer the title back to you free and clear.
How soon can you expect to get cash?
For qualified applicants, it is reasonable to assume you can get cash proceeds from your sale-leaseback within 3-5 business days of application.
Is Sale-leaseback Right for Me?
If you’re exploring different options on how to get cash for your business and have equity in your current business equipment, a sale-leaseback is definitely worth evaluating.
Compared to other unsecured cash loan options, a sale-leaseback may be more cost effective and yield a higher return-on-investment. Best of all, it allows you to maintain possession of your equipment and continue to generate profits.
What is best for your business is not always clear, which is why talking to an equipment financing expert is a good idea to best evaluate your options. If you are interested in learning more, contact us today and we can help grow your business with equipment financing tailored specifically for you.
About the Author
Stephanie Richards - Certified Lease and Finance Professional, Business Development Consultant
Stephanie is a Certified Lease and Finance Professional (CLFP) that started with Beacon as a Business Development Consultant in 2012. She prides herself at working hard to help small business owners build and grow their version of the American Dream. Whether you are just getting started or have been around for years, Stephanie will work with you to find a financing solution that fits your budget.
“It takes money to make money,” and Stephanie can help you with that.
In her free time, you will find Stephanie with her family and friends, hiking, visiting a beach or making S’mores over a backyard bonfire.