What is an Equipment Sale Leaseback Lender?

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If your business has equipment, did you know you could get financing on it? Yes, you can monetize any equipment you have to get money. A business would have funds requirements that can be planned or unplanned. Finding sources of funds is a tough job. While one can get loans or lines of credit, these options are difficult for new companies and companies having poor credit.

This is where your equipment will help you. For your business operations, you would have various kinds of equipment. Some of these equipment would be expensive. They are assets that can help you when you are in need. When you need money, you can use equipment sale-leaseback services to get financing.

An equipment sale leaseback lender is the financial agency that lends you the money. Wondering exactly what is an equipment sale leaseback lender? You can read on to know all about equipment sale leaseback lenders and how they work.

What is Equipment Sale Leaseback?

When you apply for a loan, you need collateral, or you need to have a very good credit rating. If you don’t fulfill these criteria, then don’t worry. Your equipment will help you raise funds. The equipment sale-leaseback program offered by lenders can help you get money when you need it.

The concept is simple. You can sell your equipment to a lender who will offer you money. But wait a minute! If you sell the equipment, how do you use it for your work? This is where the leaseback option comes into play. Once the lender buys the equipment, they will immediately lease it back to you.

You can see the benefits of this program.

  • You use your equipment to get the funds you need for your operations.
  • The equipment is leased back to you, which means you can continue to use it.

In an equipment sale-leaseback arrangement, your equipment will not move out of your business premises. The agreement ensures you can raise funds without having to apply for a loan or seek a line of credit.

Who is the Equipment Sale Leaseback Lender?

The Equipment sale-leaseback lender is a financial agency that offers this program to businesses. Financial agencies would be willing to lend money to businesses by using the equipment as collateral. These agencies would be happy to enter into such an arrangement since it is convenient for them.

Most finance agencies would offer the equipment sale-leaseback program. Any business in need of cash can approach the agency to get funds. The agency would have some criteria. As long as the criteria are fulfilled, the agency will sign an equipment sale-leaseback agreement.

The agreement is beneficial for both the parties concerned. The agency has the equipment in their name against which they offer a loan (for a lesser amount). Every month, they would get a lease payment from the business. In case, the business defaults, they can repossess the equipment and get back their money.

For the business, this arrangement is a great way to raise funds. They can monetize the equipment they have to get a loan. They can repay the loan at better terms than a conventional loan. Most importantly, the equipment remains with them and they can continue to use it.

How does the sale-leaseback work?

The two parties involved in this arrangement are the business that needs money and the lender or financial agency willing to lend money. The equipment is the asset of the business that is used for this transaction. One or more pieces of equipment may be included in the arrangement.

This is how this arrangement works:

  • An agreement is drawn up that explains the terms of the sale-leaseback clearly. Both parties can negotiate before signing the agreement.
  • Once the agreement is signed, the lender becomes the owner of the equipment. The business would get the money it needs. Once the sale is carried out, the lender would immediately lease the equipment back to the business. This is why it is referred to as sale-leaseback.
  • The lender is now the lessor and the business becomes the lessee. The equipment is the subject of the lease.
  • In return for this arrangement, the lessee or business would pay the lease amount to the lessor every month. The amount is decided in advance. Usually, it is a lesser amount than a loan amount. Also, the period of the lease is for a longer duration so the business benefits.
  • The lessee has the equipment in its possession and can continue to use it for its operations. However, the owner is the lessor, who has the right to repossess and sell the equipment if there is a default in payment.
  • Once the duration of the lease ends, one of the following happens:
  1. The lease is over, and the equipment goes back to its owner – the lessor or lender.
  2. The lessee can buy the equipment back from the lessor (at a pre-decided price).
  3. In some kinds of arrangements, the equipment returns to the lessee (business) once the lease expires.

How would a lender decide on the sale leaseback?

Lenders would have their requirements that need to be met before they enter into a sale leaseback agreement. These requirements may vary from case to case. In general, the following requirements are insisted upon by lenders:

  • The equipment being pledged by the business must be owned by the business. There should be no lien against the equipment. If the equipment had been purchased on loan, the loan should have been cleared.
  • Equipment that is in pieces or in numerous parts is usually not accepted.
  • The equipment must be in working condition and must not be too old. If the equipment is not being used by the business, then it cannot be monetized through a sale leaseback.
  • The value of the equipment should be around 200% of the loan amount sought. If a business wants $20,000, then the equipment they pledge should be valued at $40,000. This is done by the lender to minimize their risk. Even if the equipment value reduces over time, they would still be able to get back their money.
  • The lender would carry out a valuation of the equipment before the agreement. For this valuation, the sale price or market price of the equipment will not be the main consideration. The value would be equal to the liquidation price of the equipment. If the business defaults, then the lender has to repossess the equipment and dispose of it to get back their money. They usually do it by auction. The value it would earn in an auction along with the costs of repossessing and reselling need to be covered. Keeping all these criteria in mind, the value of the equipment is decided.
  • Usually, a lender will not give funds more than 50% of the equipment value. If the business needs more money, it can consider pledging more equipment.
  • Some lenders may even evaluate the financial position of the business before going ahead. While credit rating is not considered, the lender may want to ascertain the financial strength of the business. They may do this to assure themselves that the business can pay the lease amount.

Capital lease vs. Operating lease

There are two important concepts in a sale leaseback that need to be understood. This impacts the arrangement and is something that both parties need to decide to entering into the arrangement.

The capital lease is recorded on the balance sheet of the business. It is treated as an asset. A capital lease would result in the transfer of ownership of the asset. The business would get back their asset either on completion of the term or through a buyback. The lease is considered debt financing and interests are expenses reflected in the income statement. Depreciation can be claimed, which can help in getting tax benefits.

An operating lease does not involve the transfer of ownership. The lease payment that is made every month is treated as an operating expense. This amount is shown as an expense in the income statement. It is not reflected in the balance sheet and depreciation cannot be claimed. The lease payment would be tax-deductible.

How to choose a sale leaseback lender?

A business that needs financing can choose a sale leaseback lender by keeping the following in mind:

  • Look for a lender who has entered into such arrangements before with companies similar to yours.
  • Talk to businesses that have executed sale leaseback with the lender to find out if they are satisfied with the arrangement. The business needs to understand if there have been any problems in the execution of the arrangement and how the problems were addressed.
  • Evaluate different lenders based on the terms and conditions of the agreement. The business needs to look for a lender who charges a lower lease payment. The lease term or duration should be for a long period.
  • Overall, the terms of the lease must be better than that of a conventional loan.
  • Ideally, the best lender would be your bank or financial agency with whom you already have an existing relationship.